Is buy now, pay later a safe way to spread costs?

More Britons are relying on credit during the cost-of-living crisis, but Gen Z (aged 11-26) and millennials (aged 27-42) are four times more likely to take on debt this year to cover rising costs.

Research by credit broker Credit Karma has found a generational gap in how Brits access credit, with younger borrowers more likely to use overdrafts or buy now, pay later, while baby boomers (aged 59 to 68 ) rely predominantly on credit cards.

Buy now, pay later is a relatively recent loan method that allows you to make a purchase through a loan from a third party. It is widely available from online shopping and popular providers include Klarna, Clearpay and Afterpay.

You pay off the loan in several equal installments, or you pay the full amount in one go after a certain period. The loan is often interest-free for an initial period.

As with any loan, using BNPL involves risk. Unlike applying for a personal loan or credit card, BNPL providers often do not conduct credit checks on customers, meaning vulnerable users and those with poor credit histories can be saddled with even bigger debts.

This is especially true for people without a regular income who may not be able to pay off the loan, exposing them to high interest payments.

Young people are also having a harder time keeping up with installments, as 11 percent of Gen Z and 10 percent of millennials admit to falling behind on payments.

Akansha Nath, Head of Partnerships at Credit Karma UK said: ‘While our new research shows that young people are sadly feeling the effects of these financial pressures more than any other age group, there are a number of steps all borrowers can take to put themselves in a better long-term position.

“Looking at competitive rates, paying off as much of your balance as you can afford each month, and making sure your credit score is as strong as possible can ultimately reduce the interest you owe in the long run.”

So is buy now, pay later ever a good option for managing your expenses, and what can borrowers do to make sure they stay in control?

Are there benefits to using Buy Now, Pay Later?

Making large one-off purchases, such as a vacation or a piece of furniture, can be daunting and in some cases simply impossible on a fixed monthly income.

By using BNPL, the cost can be broken down into several manageable payments that are usually made over a three-month period.

This is similar to how someone might use a credit card with an interest-free period to share the cost of a major purchase, although the credit check requirements for using BNPL are usually less strict and there are no minimum payments.

BNPL clients should familiarize themselves with the terms of their loan to ensure they have a repayment plan

In theory, BNPL could be a valuable budgeting tool if you know when payments are due and can ensure you have the money to cover them without affecting essential expenses.

At the same time, most major BNPL providers, including Klarna and Clearpay – the largest in the UK – charge no interest and are free if you stick to the repayment plan, so it shouldn’t cost you to borrow.

The lenders make their money through a reduction in the price you pay for your purchase.

Most providers will charge you if you don’t stick to the repayment schedule, so it’s worth checking your agreement before signing up and making sure you have a clear plan for meeting the payments.

Noah Maury is 23 and lives in East London and has been using Klarna since he was at university in Lincoln. “I use them two or three times every two to three months,” he told This is Money, when he spends around £100 on the providers.

“It depends if there’s a special event, a friend’s birthday — a planned event.” I use it more in the summer.’

He says he’s not alone – all of his friends in town use BNPL to help manage cash flow. However, he acknowledges that there are risks.

“It’s out of sight out of mind until you make the payment and I think it could get pretty dangerous if you don’t use it properly and don’t have the money.”

While Noah is doing well, he has friends who have struggled to pay back larger purchases.

What are the red flags to watch out for when using BNPL?

The first dangerous habit to watch out for is using BNPL to pay for everyday goods such as the weekly shop, says Simon Dukes, CEO of Fair for You, a not-for-profit lender.

“The customer needs to understand that he can take out more and more, and he needs to exercise some self-control and awareness, because he won’t get that from the lender,” he says.

On Fair for You, the lender offers a dining club that lends people money in the form of vouchers to spend in Iceland, but it is made so that borrowers cannot rely on it.

You can use it up to six times a year – mainly during school holidays – and new loans are not approved until you have paid off the last one. These are the kinds of safeguards that BNPL won’t provide, says Dukes.

Losing track of how much you owe to BNPL providers or what dates payment is due can also be a warning sign to reduce your expenses in this way.

“Know the payment dates,” says Dukes. “Having them all come out at once can be more helpful for budgeting, but spreading them out can be more helpful for cash flow,” says Dukes.

“I think it’s like any financial product: if you use it wisely and are aware of the risks, that’s what it’s for.”