Buy now, pay later how it works

THE explosion of credit cards and in-store credit facilities resulted in a decline in noncredit payment methods for big-ticket items.

- MARTIN HESSE

There was the popular lay-by system, where the store kept an item for you until you had paid it off over a few weeks or months. I also remember many stores offering an interest-free six-month payment period on bigger purchases. Perhaps some still do, but the burgeoning credit industry largely edged out traditional staggered-payment methods that benefited consumers.

At least, this was the case until about five years ago, when “buy now, pay later” emerged on the consumer scene.

What is BNPL?

BNPL, as it has become known, is essentially a no-interest, short-term, staggered payment plan similar to the traditional methods mentioned above. But it works more seamlessly because of smartphone technology, and you get your purchase straight away, unlike the lay-by method. There are no costs involved if you pay the instalments according to the plan, so it’s basically paying cash, but stretched over a few months. This is great for big-ticket items you perhaps couldn’t afford to settle in one go. And it's especially useful in an emergency - for example, if your fridge packs up and you need a new one, pronto.

However, it can be abused, as credit cards frequently are, to buy everyday consumables, which invariably leads to trouble. Another shadow over BNPL is that it falls in a grey area when it comes to regulation, although this is likely to be rectified with new financial legislation coming through parliament in the next year or two.