How does Buy Now, Pay Later Work?

Buy Now, Pay Later (BNPL) is a popular payment option that allows consumers to purchase a product immediately and pay for it in installments over time. This payment method has gained popularity in recent years, especially among younger consumers who may not have the funds in their bank account to pay for a product upfront.

With BNPL, customers can enjoy the benefits of owning a product without having to pay the full cost upfront. Instead, they can make equal payments over a set period of time until the product is fully paid off. This can be a convenient option for those who may not have the financial means to make a large purchase all at once.

One of the key advantages of BNPL many BNPL services offer interest-free payment plans, making it a cost-effective option for those looking to spread out the cost of a purchase.

This means that you pay what you would’ve if you had bought the item in cash, just over a longer period. Your first installment—usually 25% of the total amount—is due at the time of purchase, with equal installments due over a few weeks or months, depending on the BNPL provider.  

However, it is important for consumers to carefully consider their financial situation before opting for BNPL. While it can be a convenient way to make a purchase, missing payments can result in late fees and potentially damage your credit score. It is important to make sure you can afford the payments before committing to a BNPL plan.

So, in practice, what does this look like?

Let’s say you’re shopping on Takealot and you’re happy with your order, so you proceed to checkout. When selecting how you will pay, one of the payment options is a BNPL provider. In the case of Takealot, it is Payflex.

Once you’ve selected the Payflex option, below is an image of what you may see:

A BNPL provider may then run a quick soft credit check which should not affect your credit score. After which you will be notified if you've been approved or not. You will then make your initial payment (usually 25% of the total product price) using your debit card. It's important to make the upcoming payments on time as not doing so could incur late fees and negatively impact your credit score.

Moku Tip: Please be aware that these BNPL credit 'loans' is not a way to build your credit score as it is not reported to credit bureaus and as such does not get listed on your credit report.

If Buy Now, Pay Later providers don’t charge interest, how do they make their money?

BNPL providers charge the merchants (like Takealot in the previous example) a fee to make use of their services. In some instances, if consumers do not make their payment on time, they may be charged a penalty fee. 

Is Buy Now, Pay Later really good for the consumer?

In short, yes and no. While this is a great option for people who don’t have good credit scores, and it offers a chance at financial inclusivity, it can encourage impulse buying and lead to consumers accumulating debt they just cannot afford to repay. 

The 3 main BNPL players in South Africa and how they work 

1. Payflex 
   
   Offers consumers the option of buying in-store at their partner retailers, and online purchases. For online purchases, you do not need to download the app. However, if you want to make use of their services in-store, you do. 
   You pay over 6 weeks in 4 interest-free installments. 
2. PayJustNow
   
   Offers consumers the option of buying in-store at their partner retailers, and online purchases. For online purchases, you are required to register for an account before making a purchase. 
   You pay 3 interest-free installments. 
3. MoreTyme
   
   Offers consumers the option of buying in-store at their partner retailers, and online purchases. For online purchases, you are required to register for an account before making a purchase. This process is usually very quick. 
   You pay 3 interest-free installments. 

Are you really saving or are you just setting yourself up for a debt spiral?

Remember that even though you are spreading the cost and paying later, you still have to pay. While it is an easy way to get your next purchase, and the year has been so long and you deserve to be treated, make sure that you treating yourself lasts longer than that purchase. 

If you are not using a BNPL method to treat yourself, and you’re instead using it to buy essential goods like groceries, there’s a good chance that you could be over-indebted. 

Read this blog post to find out if you have too much debt.

3 Tips for using the Buy Now, Pay later method wisely:

1. When considering using Buy Now, Pay Later (BNPL) as a payment method, it is important to carefully choose one provider and stick with them.

By using multiple BNPL providers, you increase the likelihood of accumulating debts from each one, making it difficult to keep track of and manage your payments. This can lead to financial strain and potential missed payments, resulting in late fees and negative impacts on your credit score.

By sticking to one BNPL provider, you can better manage your payments and stay on top of your financial obligations. This allows you to budget effectively and avoid falling into a cycle of debt. Additionally, by using one provider consistently, you may also be able to build a positive payment history, which can benefit your credit score in the long run.

Ultimately, it is important to approach BNPL with caution and responsibility.

2. When using Buy Now, Pay Later (BNPL) services, it is important to remember that while providers may give you a credit limit, it is crucial to set your own limit based on your financial situation.

It can be tempting to overspend and rely on the convenience of BNPL, but it is essential to be honest with yourself about what you can truly afford.

Creating a budget and sticking to it is key to avoiding financial strain and debt. It may be difficult to resist the urge to make impulse purchases, but it is important to remember that the bills will eventually come due. Being proactive and responsible with your spending will help you avoid falling into a cycle of debt and financial stress.

By setting a realistic credit limit for yourself and being mindful of your spending habits, you can enjoy the benefits of BNPL services without putting yourself in a precarious financial situation. Remember, it is always better to be safe than sorry when it comes to managing your finances. 

3. Before choosing a Buy Now, Pay Later (BNPL) provider, it is crucial to do your research and ensure that you are fully informed about the terms and conditions of their services.

One important factor to consider is whether there are any penalties involved for late payments. Some BNPL providers may charge hefty fees or interest rates for missed or late payments, which can quickly add up and negate any savings or convenience gained from using their services.

Additionally, it is important to understand whether the BNPL service is truly free or if there are hidden costs associated with using their platform. Some providers may charge account maintenance fees, transaction fees, or other hidden costs that are not immediately apparent when signing up for an account. By carefully reviewing the terms and conditions of the BNPL provider, you can avoid any surprises and make an informed decision about whether their services are right for you.

Ultimately, it is essential to check all the terms and conditions of the BNPL provider before committing to using their services. By doing so, you can ensure that you are fully aware of any potential penalties, fees, or hidden costs associated with using their platform, and make a decision that aligns with your financial goals and needs.