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Buy Now Pay Later: is it too Good to be True?

How this method of payment has impacted the way we spend money

Financial data shown in graphs

Money is something we use everyday, whether the payment be a one time purchase, the purchase be small or large, or it be a subscription. Due to this, various methods have been created in order to pay for goods and services, one of these payment types is buy now pay later, more commonly known as short-term financing.

What is Buy Now Pay Later? What are the different services that provide financing?

Buy Now Pay Later is the process of dividing the the total payment of a good or service into monthly installments in order to spread the cost. This process comes in various forms, and can be paid over different time periods, for example in yearly installments. This process is most popular with high cost purchases, for example mortgages. However, the process of financing goods and services has become increasing popular with lower cost more common purchases. One of the most common services created from this is Klarna.

"Klarna offers a pay-in-four payment plan, which lets shoppers split their purchase into four equal installments to be paid every two weeks, with the first due at checkout."

From this, Klarna has created a service in which the idea of dividing costs for goods and services can be used for cheaper everyday purchases, meaning even if you are financially unable to purchase an item at a specific time, for example an item of clothing or a piece of technology, you are able to still purchase the item but in a way that is financially available to the buyer.

Klarna is also widely available amongst the most popular online stores and websites, these companies include Tessuti, ASOS, Boohoo, Calvin Klein, Uber Eats and many other popular businesses provide a Klarna payment option on their website.

To learn more about Klarna, this section on their website goes into detail on how Klarna works.

Are services like Klarna actually financially benefiting users?

As previously mentioned, the premise of companies like Klarna is to split the total of payments of an item in order to make it more affordable, however, does this buy now pay later payment scheme create a spending problem amongst the public.

It can be said that services such as Klarna create a higher likelihood of frequent purchasing due to the lower upfront cost, as it gives the customer the idea that they can just pay it off later. Therefore, this could lead to consumers buying items more frequently on payment schemes such as Klarna that they wouldn't buy outright. It can then be argued that services such as Klarna have created a false idea of what is and what isn't affordable amongst consumers. It was found through the charity StepChange that the amount of people who owed money to companies such as Klarna is increasing, meaning that while the affordability may seem attractive in the short term, long term it seems more and more consumers are having financial troubles using the buy now pay later model for purchasing.

In order to learn more about debt and the help you may potentially need, the charity StepChange has various pieces on what you can do in order to take the steps out of debt.

What effect does Buy Now Pay Later payment methods have on credit scores?

An individual's credit score is hugely important when regarding their finances, as someone's credit score is a reflection of their financial history, and depending on this score, this can have a massive impact on one's ability to secure loans for purchases such as houses. Going into more detail, one of the factors determining an individual's credit score is their ability to repay a loan, therefore someone's ability to payback on time will have a huge impact on their credit score.

Therefore because of the increasingly popular buy now pay later, this increases the amount of payments someone has to make over time, which could lead to potential missed or late payments made, therefore negatively impacting someone's credit score, and therefore potentially making the individual come across less attractive if they are in a situation where they want to secure a loan. More information on this subject can be found here.

Whilst the attractiveness at first with buy now pay later payment methods does seem strong at first due to the lower up front costs and a more affordable plan, if this method is used too much or incorrectly, it can lead to big issues for the consumers, leaving them in debt from their purchases and lowered credit scores.

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