Is Buy Now Pay Later cheaper than ‘traditional’ credit?

Wondering whether Buy Now Pay Later is a good option for you? We break down what Buy Now Pay Later is and whether it is cheaper than ‘traditional’ credit.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man sat at laptop computer using credit card to pay online using mobile phone

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A shift towards online shopping and cashless transactions has changed the way we make payments. Klarna’s latest Shopping and Money Management trend reports have found that while 85% of people have heard of Buy Now Pay Later, only a quarter have actually used it.

In this article, we take a look at look at how Buy Now Pay Later works and how it compares to ‘traditional’ credit.

[top_pitch]

What is Buy Now Pay Later?

Buy Now Pay Later is a type of credit where you can make a purchase and pay for it at a later date. Its use is becoming more widespread among online retailers, through the likes of Klarna, Clearpay and Laybuy.

Typically, the agreement will let you pay after a set period of time. Or it will let you pay for the purchase in instalments.

You will tend to find that it is a short-term credit option, with the interest-free period lasting around three or four months.

Is Buy Now Pay Later cheaper?

The lure of interest-free purchases can be tempting. And if used correctly, Buy Now Pay Later could see you avoid interest charges and fees. However, it can make it hard to keep track of your purchases. And there are significant consequences if you miss a payment.

In general, if you repay the cost of your purchase within the specified time frame, then Buy Now Pay Later won’t cost you anything.

However, if you don’t clear the debt before the payment period is up, then you could be asked to pay a settlement fee, or a lump sum of interest could be added to your debt. Interest charges are typically high – sometimes reaching around 39.9%.

Having said that, it’s notable that Klarna’s Pay in 30 and Pay in 3 installments products don’t charge interest or fees at all. Even if you miss payments or don’t pay at all. But if you fail to pay, they may turn your information over to a debt collection agency. 

Whereas Clearpay charges a maximum late fee of £6 for each order below £24. If your order is above £24, it caps late fees at 25% of the original order value or £36, whichever is less. Another Buy Now Pay Later company, Payl8r, will charge interest at a daily rate for the entire period of the loan if you fail to pay. This is in addition to a £15 fee if you miss a payment. 

And in the case of some Buy Now Pay Later products, missed or late payments will show up on your credit report. So you could risk damaging your credit score if you don’t clear the debt in time.

You may also find it hard to keep track of your Buy Now Pay Later agreements, as each is attached to an individual purchase. If you use the service multiple times, you may find it hard to remember each payment deadline. And that is when you could potentially get into trouble.

[middle_pitch]

What about ‘traditional’ credit?

Klarna’s report shows that 26% of Brits don’t know their credit card interest rate. It also shows that 15% only pay the minimum balance each month. But if used correctly, then a credit card is just the same, if not cheaper, than Buy Now Pay Later.

The benefit of a credit card is that it can be used in most stores. So you can spread the cost of several items and your borrowing is in one place where you manage it.

You will find most credit cards offer a 56-day interest-free period on purchases. That is as long as you pay your balance in full and on time each month.

If you need more time to make a payment, then a 0% purchases credit card can give you a longer runway. These deals tend to be considerably longer than what is offered with a Buy Now Pay Later agreement.

Using a 0% purchases credit card can give you more time to pay off your balance while avoiding costly interest charges. It will also keep all your purchases in one place. This means that no matter how many purchases you make, you only need to focus on paying off one debt at a time.

If you would like to see if you are eligible to apply for a 0% purchases card, take a look at our credit card eligibility checker.

Takeaway

If you do choose to use a Buy Now Pay Later service, it’s key to do your research. Try to choose one that’s reputable and whose terms you fully understand. It’s also important to note that, whether you are using a credit card or Buy Now Pay Later, borrowing money requires you to repay it. So only borrow what you can afford to pay back.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »