The True Cost Of Buy Now, Pay Later Schemes

Photo by cottonbro studio

It feels like every time I shop online, one button demands my attention. ‘Buy Now, Pay Later’ flashes like a ghostly spectre. At some point in my life, the lesson of not spending more than you physically have was drilled into my mind. Perhaps it was my Junior Cert Business Studies teacher who started every lesson with the phrase, “Never get a credit card”.

Or maybe it was my parents who, over the course of their lives, have only had one loan – their mortgage. The idea of owing money puts an anxious pit in my stomach. In short, if I can’t afford it with the money in my bank account I ain’t buying it. And getting a loan used to be difficult in any case.   

Now several brands have come out with these Buy Now, Pay Later or BNPL options. While it depends on each company, these schemes usually allow you to delay your payment on your purchases for up to six months. They usually have big shiny, colourful buttons with those four words emblazoned across them. So what exactly is Buy Now, Pay Later?

Simply put it is a type of short-term financing that allows customers to make purchases and pay for them over a short amount of time. Often, there is no interest attached but it all depends on each separate company. While it seems like a very simple way to get your hands on the perfect addition to your wardrobe, there are plenty of strings attached that you may not know about. So what exactly happens when you BNPL?

Financial Expert John Lowe of MoneyDoctors.ie admits, “It’s dangerous. It’s like your flexible friend where you didn’t think you had to pay the money back but now you realise you suddenly do.” 

While he explains most of these schemes are for amounts under €500, you can end up paying back a lot more than this in the long run. “If you are lucky you will find that the provider isn’t charging interest. The interest is where these companies make money. But the real money is made when you miss a payment. There are late payment fees that happen then and you are being charged interest on interest at that stage.” 

Yes, if you forget to pay your monthly instalment you will be penalised severely and end up having to pay back more than you expected.  

“If you do miss a payment, that can affect your credit rating,” John explains, adding that this will be marked down on the Central Credit Register. If you’re unfamiliar, well, the Central Credit Register is a database that stores personal and credit information on loans of €500 or more. This is the place banks will look to see if you can get a mortgage or not. 

“Missed payments in any of these institutions, even if you miss an overdraft that is recorded on that register. The first thing that these credit institutions do when you are looking for money, whether it’s a mortgage or a car loan or a Credit Union loan, they will check with the Central Credit Register to see if you’ve been good,” John says. 

Photo by Karolina Grabowska

Of course, we’re not trying to say that you should never, ever use these types of loans. But John explains the steps that you should go through before you impulsively click that shiny button. 

“Before you start you taking money out of these places you have to check the rules and regulations. All of your concerns need to be addressed before you grab the clothes and live happily ever after because it can turn sour. Know what you’re getting into!” 

So what exactly should you know before you chose to go down this road? 

“Firstly I would check to make sure if interest is being charged and then what are the late payment details,” he says. Next, check if there are any penalties for paying off early AKA “early redemption”. This is the charge you pay if you choose to repay your loan earlier than the original final repayment date. These can begin at a 10% charge for paying early. Usually, in the case of BNPL you agree to a six-month term. So if you have the money within four months you will be charged extra. 

And finally, John says that you need to make sure that you add in that extra cost of paying back your loan every month. 

“You have to budget the repayments as part of your monthly payments. That’s the key to make sure that you’re not exceeding the income that you have by having to borrow again.” 

John admits he personally “wouldn’t be a fan” of these types of loans as you can end up buying impulsively and not accounting for the monthly repayments. In fact, a 2022 survey from LendingTree found that a massive 70% of people admit to overspending when BNPL is an option.

John also adds that you can end up with a “never-ending loan”. “It is a form of credit but you have to be really wary with it. For some people who are disciplined and can manage this, it’s fine,” he adds. “Part of life is about making sure that you are spending within your income limits. If you have to exceed that you have to go to your savings and try to go from there. If you don’t have the savings then you have to go borrowing or do without.” 

He goes on to explain that in recent years people have really had to take a hard look at their finances and see what they can or can’t live without. “If your expenditure is exceeding your income you have three choices – earn more, cut costs or prioritise. I think that’s why over 3000 people in Ireland stopped paying their health insurance. They simply couldn’t afford it.”

There are plenty of alternative options to this. If you don’t need the item right now you can save up before buying it. You could search for the item elsewhere to find it cheaper or even find a cheaper alternative! If it’s something that you’ll only use once, why not try renting it or asking to borrow it from friends or family?  If you really can’t live without it, the Money Advice and Budgeting Specialists suggest using a Credit Union loan, called the “It Makes Sense” loan.

These loans can be between €100 and €2,000, with a repayment time of one month and two years. While Buy Now, Pay Later schemes seem to be pretty harmless they can be a risky choice if not taken seriously. They may not seem as scary as a loan from a bank or a Credit Union, but they are essentially the same thing and should be treated as such. As John simply says, “If you take out a loan you have to commit to paying for it. It’s like life really. If you make a commitment you have to honour it.”

This article originally appeared in the September 2023 issue of STELLAR magazine. 

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