Before you hit click to buy a dress, a phone or a couch online, it’s now usual to see a message asking you if you want to split your purchase into three payments or pay over a longer period.

This Buy Now, Pay Later (BNPL) form of short-term consumer credit has been around for years to help pay for big items like kitchen appliances, furniture and TVs. Now though, companies like Klarna or Humm and many others are offering this type of ‘flexible finance’ to spread the cost of much smaller items like clothing, footwear or even, in recent times, takeaways.

It is predominantly associated with impulse-type purchases bought via online shopping and, according to recent research by the Central Bank of Ireland, is popular among the 25-44 age group who can sign up quickly. Retailers partner with the BNPL providers because it has been shown to significantly increase spending by shoppers.

However, the Central Bank research revealed that there is poor understanding of how the BNPL model works, and 36% of those surveyed believed it was a method of payment rather than a form of credit.

Muriel Dolan, deputy director of communications at the Competition and Consumer Protection Commission (CCPC), says these products have grown in popularity in recent years, largely because of the convenience factor.

“It’s right there whether we go online or in-store, and we are all human, so when you see something you want but maybe you can’t afford it, and that option [BNPL] is available – there is that impulse to buy,” she says.

“It may mean that you might only have to pay only a little bit [now] or nothing for a few months, depending on the type of BNPL product it is, so it can be very attractive.

However, the Central Bank research revealed that there is poor understanding of how the BNPL model works, and 36% of those surveyed believed it was a method of payment rather than a form of credit

“I think a lot of people don’t realise that it is a form of credit or a loan. They think it is just a deferred payment.”

Benefits and pitfalls

For smaller value items, BNPL generally offers shoppers the opportunity to split the payment into three or six instalments, often with 0% interest, once you pay on time.

“It can be a good option if it’s interest-free and you can pay it back in accordance with the terms and conditions. But if you don’t pay it back, what happens is you are going to get interest on top of what you are paying or fees, and they can be quite expensive,”– similar to credit card arrangements, Muriel warns.

Some financial institutions like Revolut have a ‘Buy It Fast, Pay It Slow’ function where you can split it into three instalments with 0% interest; however, there is a 1.65% fee on the purchase.

While the 0% interest option can work well for some, others can get into difficulty when they have several of these types of payment plans running at the same time, which can lead to a credit card paying for more credit and a cycle of debt.

“It can be very easy to lose track of when you have to pay them,” says Muriel, adding that when you sign up, you generally attach a debit or a credit card to the account. “If you give your credit card [for the BNPL payment] and you’re not paying off your credit card [every month], the credit card interest rates are from 13% to 22.9%, so the amount keeps rising.”

Muriel Dolan, deputy director of communications at the Competition and Consumer Protection Commission (CCPC).

For more expensive items, such as a couch, for example, the BNPL products vary. Generally, they will be over a longer time period and could incur interest – varying from 0% to 23%. Watch too for extra charges like application fees, regular account-keeping fees or a charge for freezing your payments for a time.

Two leading nationwide retailers offer consumers the chance to spread the cost of a couch with the warning that “this is a high-cost loan” or “high-cost credit”. The interest quoted in these BNPL cases are an eye-watering 39.7% APR and 46.9% APR, respectively.

What’s really important to remember, according to Muriel, is when you enter any BNPL agreement that you understand the future implications if things go wrong.

“If you don’t pay it, the company, whoever it is, can sell it to a debt collecting agency, and they will pursue you for the money.

Also, if it is over €500, your credit rating can be affected.

“What that means for readers is that in the future, when they are looking for a car loan, a holiday loan or a mortgage, they may be refused credit because they have shown in the past that they have not paid or defaulted on a loan,” she adds.

Advice for consumers

Stop before you click is Muriel’s advice, and ask yourself: do you still want to be paying for a takeaway in three months time? Can you save a portion before you buy or look for other lending options like your local credit union or financial institution, which may have more competitive rates?

If you’re trapped in BNPL debt, she advises to stop using the payment option and go to Money Advice and Budgeting Service (MABS) to put a repayment plan in place.

“If you are in trouble, try and deal with it now before it gets worse,” Muriel says, “because the fees will keep mounting up otherwise” with grave consequences.

See ccpc.ie or mabs.ie