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'Buy now, pay later' schemes explained

Find out how BNPL schemes such as Klarna, Clearpay and Laybuy work, how they compare to credit cards, and what happens if you miss repayments

In this article
How BNPL schemes work How Klarna, Clearpay, Laybuy, Paypal and Zilch compare Which banks are offering BNPL? What’s the difference between BNPL schemes and credit cards?
Credit scores and late fees: what are the risks of using BNPL? What protections do I have if something goes wrong? Can I use BNPL in-store? Which? calls for urgent regulation of the sector

How BNPL schemes work

‘Buy now, pay later’ (BNPL) schemes are a form of short-term credit.

Typically the schemes allow you to pay for items in instalments or in one repayment at a later date, interest-free.

Repayment plans normally last 12 months or less.

How Klarna, Clearpay, Laybuy, Paypal and Zilch compare

Klarna, Laybuy and Clearpay are the three biggest BNPL providers in the UK. 

But the industry is rapidly growing and there are new providers offering different schemes all the time. 

No two BNPL schemes are the same, so it’s important to double-check how they work before signing up for a new one.

Which? research has found some retailers offer as many as six BNPL schemes at the checkout, but it’s not always clear how they differ in terms of late fees, credit checks, or repayments.

In the table below, we look at some of the key differences between the biggest BNPL providers and the main options they provide to retailers.

BNPL provider Repayment plan

Are repayments taken automatically? *

Are you able to defer repayments? ** 

Late fees Soft or hard credit checks? *** Do missed payments impact your credit score? Will missed payments be passed to debt collection agencies (DCAs)?
Clearpay ‘Pay in 4 instalments' Four payments over six weeks Yes Yes Yes - a £6 late fee. For orders over £24 late fees are capped at 25% of the total order cost or £36 - whichever is less No affordability checks - it will start by giving you a low lending limit which increases if you make repayments No Yes, but only after every reasonable attempt to contact the customer with outstanding payments has been made. It does not make house visits.
Klarna 'Pay in 3 instalments'

Three payments over two months

Yes Yes No Soft check Missed payments for purchases made on or after June 1, 2022 are recorded on your Experian and TransUnion credit report.
Your overall credit score won't be impacted for now, but it will be visible to other lenders.
Yes, but as a last resort if repayments aren't made after several months and only after several additional reminders are sent without customers responding. It never sells debt to debt collectors and instructs DCAs to not use bailiffs or initiate legal action.
Klarna 'Pay in 30 days'

You pay up to 30 days after placing your order

No Yes No Soft check

Missed payments for purchases made on or after June 1, 2022 are recorded on your Experian and TransUnion credit report.
Your overall credit score won't be impacted for now, but it will be visible to other lenders.

Yes, but as a last resort if repayments aren't made after several months and only after several additional reminders are sent without customers responding. It never sells debt to debt collectors and instructs DCAs to not use bailiffs or initiate legal action.

Laybuy ‘Pay in 6 instalments'

Six payments over five weeks

Yes No

Yes - a £6 late fee can be charged twice per missed instalment

Hard check Yes Yes, but as a last resort after other attempts to collect the outstanding payment have been exhausted. Laybuy doesn’t pass on late fees and pays the costs for debt collection.
Openpay (no longer available in the UK)*

Three to six monthly payments

Yes No

Yes - a £7.50 late fee is taken followed by a further £7.50 if the payment is late for more than 10 days.  Fees are capped at £15 per plan

Hard check for the first transaction followed by soft checks for subsequent transactions

It's not clear whether Openpay passes the information on missed repayments to credit reference agencies. We've asked the firm to clarify this and will update the table when we hear more. Yes, Openpay uses third-party debt collection agencies to contact unresponsive customers who are in arrears via post, SMS and telephone. It never carries out in-person debt collection, either in-house or through a third party.
PayPal ‘Pay in 3’ Three payments over two months Yes No No - not for any agreements made after 30 September 2021 PayPal says it runs soft credit checks ‘if needed’ Yes, PayPal says your credit records may be affected. Yes, but only after making repeated attempts to make contact with a customer about outstanding payments.
Zilch Four payments over six weeks
 
Yes Yes No

Soft check via Open Banking

Zilch says it may provide details of late payments to credit reference agencies, which could affect your credit rating.

Zilch told us it doesn't currently use a collections agency, but as a regulated lender it reserves the right to use this method.

 

*Some BNPL schemes take payments automatically using card details you provide at the time of payment. Others ask you to make your repayments manually within the timeframe agreed.

**You may be able to delay repayments to a later date with some BNPL schemes - it's important to check exactly how this works with your BNPL provider.

***A soft credit check is where companies take an initial look at certain information on your credit report. They aren't visible to other companies and have no impact on your credit score or future credit applications. Only you can see these checks on your report. A hard credit check is where companies carry out a more in-depth search on your credit report. This will be recorded on your report, so other companies will be able to see you applied for credit. Hard credit checks can affect your credit score.

****Openpay announced it would be leaving the UK market in March 2022, although it will still offer some longer-term repayment plans for dental procedures and car repairs in the UK through 'strategic partnerships'.

When will Apple offer BNPL in the UK?

Apple is planning to launch a 'pay later' feature in the US this autumn, allowing shoppers to spread payments across four instalments over six weeks.

US iPhone users will be able to use the scheme anywhere that accepts Apple Pay, making the option to pay via BNPL more widely available than ever.

We're yet to hear if and when they'll be introducing a BNPL feature in the UK, but we'll update this page when we know more.

When will Zopa offer BNPL in the UK?

Zopa also plans to enter the BNPL market.

It announced the move at Money2020 Europe and revealed the scheme would be for bigger ticket items worth £250-£30,000, would use affordability checks and would report debts on credit reports.

However, the bank will wait until regulation takes form before launching to UK consumers.

Which banks are offering BNPL?

Some banks are offering their own BNPL options too.

Monzo, for example, has launched Monzo Flex, which allows you to pay for items on a BNPL repayment plan.

Unlike the schemes offered by Klarna, Laybuy and Clearpay, Monzo Flex allows you to use BNPL with any business that accepts Mastercard for payments over £30.

It works in three interest-free instalments and you can decide to split the payment after you’ve made it too.

Monzo carries out an affordability check before lending to you, carrying out a soft credit search that isn’t visible on your credit report to other lenders. Once Monzo has assessed your affordability, it’ll offer you a credit limit of up to £3,000.

At this point, you’ll be asked to agree to the terms of the borrowing agreement and Monzo will then carry out a hard credit search, which will appear on your credit report and be visible to other lenders.

One benefit of using BNPL with a bank rather than an independent provider is that banks have a more complete view of your spending habits if you already bank with them, helping them better judge your affordability limits.

Revolut has announced plans to offer a BNPL option too, while HSBC has introduced a BNPL option for its existing credit card customers.

Find out more: get the latest BNPL news

What’s the difference between BNPL schemes and credit cards?

Though they’re both a form of credit, BNPL schemes work differently from credit cards.

One of the key differences is that you don’t get Section 75 protection when you pay with a BNPL scheme.

Section 75 protection means your bank is jointly liable if anything goes wrong with purchases worth over £100 and up to £30,000 made on your credit card. If you experience a missing delivery or faulty product, for example, you can make a Section 75 claim with your credit card provider and get the money back this way.

As BNPL schemes aren’t covered by Section 75, you should consider using your credit card for larger purchases.

Here are some other key differences between BNPL schemes and 0% credit cards to take into account before deciding which type of credit is best for you.

  BNPL schemes 0% credit cards
Section 75 protection

No - you’ll be at the mercy of the BNPL provider’s individual protection scheme which isn’t enshrined in law

Yes
Type of credit check

It depends on the provider, but most only carry out a ‘soft’ credit check

Hard credit checks
Timeframe for interest-free period

Typically within six weeks - always within 12 months

Between three and 24 months with a new 0% credit card deal

Complaints

You can only complain to the individual BNPL providers, not to the Financial Ombudsman Service (FOS)

You can escalate your complaint to the Financial Ombudsman Service (FOS) 

Additional fees

With some providers you’ll be charged late fees if you miss your repayments

You’ll have a monthly minimum repayment you have to make or face extra fees

 

Find out more: the best 0% purchase credit cards

Credit scores and late fees: what are the risks of using BNPL?

As with all types of credit, there are risks if you miss BNPL repayments.

Your credit score could be impacted if you don’t pay your instalments and, if you continue to miss repayments, some BNPL providers will refer you to a debt collection agency.

Some BNPL providers don’t leave any trace of your interest-free borrowing on your credit report, but others such as, Laybuy and Openpay, do.

Having a poor credit score could impact your ability to borrow in the future.

Though you won’t incur interest on your repayments, some BNPL schemes do charge late fees if you miss your repayments, meaning your purchase could end up costing far more than you’d planned.

Which? research has shown that almost a quarter of BNPL users spend more when using the schemes than they normally do. As most BNPL providers don’t run hard credit or affordability checks before lending you money, it’s important to really make sure you can afford the repayments before committing.

Will BNPL borrowing impact your mortgage chances?

Which? research in October 2021 found lenders are taking an inconsistent approach to how they ask about BNPL debts and treat this form of borrowing. We found only four in 10 lenders ask about BNPL borrowing on their mortgage agreement in principle forms. 

The inconsistent approach means that – depending on which you apply with – your BNPL commitments may not come to light until you submit a formal application for a mortgage later on in the homebuying process and go through a hard credit check.

While some BNPL providers don’t leave any trace of your interest-free borrowing on your credit report, others do. When we asked lenders how they get the full picture on BNPL debts, several confirmed that they look for BNPL commitments when analysing bank statements (you usually need to give them three months’ worth). This means even if your BNPL borrowing doesn’t appear on your credit report it will be picked up eventually.

Lenders told us they make a distinction about short-term vs longer-term BNPL. So, a £50 jacket that you choose to defer paying for 30 days, interest-free is unlikely to scupper your mortgage, as this will most likely be paid back by the time your mortgage is granted. However, a £500 washing machine you’ve chosen to split into six payments would be a debt commitment that will impact how much spare cash you have each month and therefore will need to be taken more seriously.

This means you will need to think carefully about the type of BNPL scheme you use to avoid falling into the longer-term debt category, which looks more like a traditional credit agreement and could have greater influence over a bank’s decision to lend to you.

What protections do I have if something goes wrong?

Unfortunately, you’re not covered by Section 75 protection when you use BNPL schemes, nor can you escalate a complaint to the Financial Ombudsman Service (FOS) like you can with other regulated credit products.

If you experience an issue with something you paid for with a BNPL scheme, such as a missing delivery or faulty item, you’ll need to look at the BNPL provider’s protection scheme instead.

Each BNPL firm will have its own policy for you to follow if you run into trouble with your purchase. Most ask that you try to resolve the problem directly with the retailer, to begin with.

Which? has previously heard from customers who have been left waiting for refunds or for outstanding payments to be settled after returning unwanted items purchased with a BNPL scheme. One JD Sports customer waited over three weeks for a refund to come through after returning a pair of trainers.

If you find yourself in a similar situation or experience another type of issue with your purchase or repayment plan, you should contact the BNPL provider as soon as possible to ask them to freeze your upcoming payments.

Be sure to collect as much evidence as possible - such as photos of faulty items or failed deliveries and screenshots of messages from the retailer - in case you struggle to get it resolved.

What happens if the retailer I've bought from goes bust?

If you’ve bought something with a BNPL scheme and the retailer falls into administration, you’ll still have to continue meeting your repayments as normal if you want to keep the items.

This is because BNPL providers pay upfront for your items when you place your order - you are simply paying them back with your instalments.

When retailers go bust, the administrators can decide to stop honouring returns - meaning you could be stuck having to continue making repayments for items you don’t want.

Here’s what each provider told us you should do if you've paid with a BNPL scheme and are refused a refund:

  • Klarna told us you should raise a dispute with it as normal and the company will let you know how it can offer support - this could include offering a refund for unwanted or damaged items.
  • Laybuy told us that if the administrators decide to stop returns, you'll still have to make your repayments. If the situation is likely to cause you hardship, Laybuy will engage with you to find a solution such as an alternative repayment plan or pausing or cancelling repayments. Laybuy said it will write off the outstanding debt if the retailer doesn’t ship the goods at all.
  • Clearpay told us it will refund you in accordance with your rights if you notify it that you intend to or have returned the goods. If you don’t receive your items, it will refund you or cancel your debt. It says you won’t ever be in a position where you’re out of pocket or lose your legal rights to return.
  • PayPal says you can raise a dispute with PayPal Buyer Protection.
  • Zilch says that as a regulated credit product, you’ll benefit from the same level of protections you’d get with more traditional types of credit if something goes wrong - such as Mastercard’s chargeback policy for refunds and Section 75 if the purchase is over £100.

Can I use BNPL in-store?

With some retailers, you may be able to use BNPL schemes in-store.

You’re normally required to have an existing agreement or account with the BNPL provider, and you’ll need to access a portal on the provider’s app to make the transaction.

You’ll then be asked to generate a barcode via the app to present at the till.

While not all BNPL providers offer an in-store option, most are looking to expand into physical stores - so you might start noticing it more frequently when out at the shops.

Which? calls for urgent regulation of the sector

Most BNPL schemes aren’t currently regulated by the Financial Conduct Authority (FCA).

This means BNPL users have fewer protections if something goes wrong and BNPL providers don’t have to follow the same rules as other credit providers.

The government announced plans earlier this year to regulate the sector following a string of Which? investigations uncovering potential harm to consumers.

Some of our concerns include:

  • BNPL users aren’t covered by Section 75 protection if something goes wrong with an order or purchase.
  • BNPL users aren’t able to make an official complaint to the FOS if they’re unhappy with the service received by their BNPL provider.
  • BNPL providers don’t have to run affordability checks on users - meaning consumers could end up taking more debt than they can afford.
  • BNPL providers don’t have to report when customers miss payments - meaning other credit providers might lend to consumers without knowing they already have outstanding debts with BNPL firms and are struggling to make repayments.

Which? is calling for urgent regulation of BNPL firms to ensure consumers are better protected when deciding to pay later at the checkout.


2 Feb 2022: Table updated to say that Clearpay users' credit reports will not be marked if they miss repayments

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