‘Buy Now, Pay Later’,sometimes also abbreviated to BNPL, is a form of money-lending where a customer may opt to make a purchase through instalments, spread over a specific period of time – usually a few weeks.
BNPL has become increasingly commonplace in South African e-commerce websites and certain physical retailers. In this helpful guide, we’ll explain how this payment arrangement works, what its benefits are, and what drawbacks it can have.
How does ‘Buy Now, Pay Later’ work?
Buy Now, Pay Later is intended to offer customers a way to purchase high-value items with funds that they do not have at the time of purchase, but will expect to have over coming weeks as a result of their income. BNPL options do not usually charge interest, but will offer a far shorter repayment period when compared to a traditional loan – taking the length of a few weeks, as opposed to regular instalments over a certain number of months.
Is ‘Buy Now, Pay Later’ the same as a laybuy?
Buy Now, Pay Later enables a customer to pay a first instalment and receive their order and item of choice, and repay the remaining instalments over a number of weeks.
A laybuy, in comparison, means that a customer is able to pay instalments and then only receive their purchase once it has been paid off.
Why has ‘Buy Now, Pay Later’ become popular?
Buy Now, Pay Later has quickly become a popular method of payment for South Africans who, wishing to purchase higher-value items, may select it to bridge their payments over several weeks and manage their cash flow. BNPL may also be an enticing payment option given it does not charge the normal interest rate and fees a short-term loan would; however, this can come with important consequences we’ll elaborate on below.
Is ‘Buy Now, Pay Later’ a loan?
While Buy Now, Pay Later is a form of instalment loan, it is important to note that it is not the same as a short-term or personal loan.
Whereas short-term or personal loans advance cash to enable you to manage your financial needs, BNPL does not advance you financial capital and rather allows you to divide the remainder of your payment into instalments.
As such, many BNPL options do not leave a record on your credit report, though they may wish to check your credit score at the point you apply to use it when purchasing an item. Further, as BNPL does not charge interest or fees, it does not give customers protection under the National Credit Act.
Will this impact my credit score?
At the time of writing, opting to use Buy Now, Pay Later will most likely not reflect on your credit report, with the caveat that different BNPL providers may opt to report your purchase to a local credit bureau. This means that your choice to use BNPL, and your subsequent timeous repayments of your instalments, will likely not appear on your credit record.
However, should you fall behind in your repayments or fall into arrears with your account, your outstanding debt may be handed over to a debt collector – meaning that your outstanding balances will be reported to a credit bureau and your credit score may be negatively impacted as a result.
Should I use ‘Buy Now, Pay Later’ or apply for credit?
While Buy Now, Pay Later can be a useful way to manage your spending on expensive items such as furniture or appliances, it’s worthwhile to note selecting it as a payment method should to be done with careful consideration.
Although items purchased on BNPL may not legally constitute a ‘traditional’ short-term loan, it is worthwhile to consider that by opting to pay as such, you are entering into a payment agreement based on credit.
As such, you will be expected to manage your repayments responsibly and make repayments on your purchase on time, though you may not have access to the same legal protections that apply to loans charged at interest, which are regulated by the National Credit Act.
As a result, missing an instalment or repayment on a BNPL purchase may come with excessive fees or costs.
Selecting BNPL can also be an easy way to overspend, considering that common repayment terms do not typically align to a monthly salary cycle – meaning that your final instalments may fall due before your next monthly source of income has arrived. This can place pressure on your budget and monthly cash flow, and may lead you to overspend over what you originally intended to during a month.
Formal loans, such as short-term loans or personal loans, are carefully regulated by the National Credit Act and have strict repayment terms that align to monthly cycles that will typically allow you to choose a monthly repayment date.
Although these loans may be more costly depending on the interest rate and fees they may charge, it is worthwhile to consider that you may benefit from a number of built-in protections under these loan agreements such as regulated interest rates, account fees, and credit life insurance.
When you next opt to purchase an item, it is important to consider what payment methods will work best for you and your budget, and what legal protections you are offered should you choose to make use of credit.