When we think of financing or borrowing we tend to think of traditional unsecured loans, which account for an average unsecured debt of £3,838 per UK adult back in November 2020.
However, there are various other types of business and personal borrowing in the UK, from invoice financing to the increasingly popular ‘Buy Now, Pay Later’ (BNPL).
But what exactly does the latter refer to, and how does it work in the current consumer marketplace? Let’s find out.
What is ‘Buy Now, Pay Later’?
The term ‘Buy Now, Pay Later’ is fairly self-explanatory, as it refers to a short-term financing agreement that enables customers to make real-time purchases and repay this debt at a future date or over an agreed period of time.
Typically, these agreements are designed to make consumerism more affordable, which is why most BNPL arrangements are interest-free.
This type of agreement may also be referred to as ‘point of sale instalment loans’, while it has also become increasingly popular online and as the ecommerce segment has continued to grow at an exponential rate.
How Does BNPL Actually Work?
Using BNPL financing can be convenient for customers, but how exactly does it work in the marketplace?
Well, services such as Klarna UK are best known for providing BNPL financing and services, which can be accessed by customers when they look to buy a particular item online.
At this time, customers will make a nominal, upfront payment toward the purchase, while Klarna organises for you to pay off the remainder of the retail price in a predetermined number of instalments. The number of instalments and their value will be determined by the size of the retail price, while you can review any potential payment plan before you commit to the purchase.
As we’ve already touched on, these payments won’t be subject to interest, while the typically nominal amounts of money borrowed through BNPL agreements means that they’re easier to access than traditional sources of unsecured credit.
On a similar note, BNPL agreements won’t affect your credit score, although repeated late or missed payments may undermine your report over time.
Considerations From a Business Perspective
BNPL financing also benefits businesses, who may be able to sell more products and reach a wider range of customers through the provision of practical payment options.
This is particularly true in the age of open banking solutions, through which consumer banks can share customer data (when approved by the consumer) with third-party applications and lenders who may be able to offer BNPL loans and agreements across the board.
As the BNPL marketplace becomes increasingly competitive, both businesses and customers may be able to prosper further from more lucrative offers, as such agreements become more widely available across a broader range of products.
