Buy Now Pay Later (BNPL) is a form of financing where you purchase goods or services without paying upfront, instead spreading out payments over a set time period. Sounds pretty harmless right? Well, that’s not quite the case… not only can BNPL encourage overspending and debt, it can also affect your ability to get a mortgage!
0% Interest… or is it?
Many Buy Now Pay Later deals have a headline 0% interest rate, making them attractive to customers and also making them appear like they aren’t a form of credit at all.
However, they are indeed still a form of credit, and you will have to pay back what you owe. Buy Now Pay Later lenders aren’t your best friend lending you money- they make money out of their lending, especially in the form of fees and interest being charged after a set period of time.
It is in the lender’s own interest for you to miss payments as this means they can start to charge fees and make a profit off you. Even if they are advertised as 0% interest, this does not mean it will remain that way, and after the set grace period, interest will usually be charged.
Credit Score
Failing to make payments can negatively impact your credit score which means mortgage providers will see you as less creditworthy, and more risky to lend to.
“Almost half (48%) of users report missing at least one payment in the past, and half (47%) of this population reporting being hit with extra fees as a result. Consumers will find missed BNPL payments appearing in their credit reports next year, so it’s vital that anyone using it sees it as the credit product that it is.” – Jayadeep Nair, Chief Product and Marketing Officer at Equifax UK
Continuously missing payments to the detriment of your credit score could ultimately see you being denied mortgages or being offered less desirable loan terms and interest rates from mortgage lenders.
If you have a Buy Now Pay Later agreement you should make sure that you clear the entire debt and that you keep an eye on your credit score and take action where possible to improve it.
However, you should avoid borrowing money to clear off a Buy Now Pay Later loan, as using a debt to clear a debt will not help the situation!
Unreliable Borrower
Which? applied for a DIP (an agreement in principle from a lender to understand what you can borrow) from 10 of the UK’s biggest mortgage lenders. Out of these, 4 lenders specifically asked for details of BNPL arrangements alongside other credit commitments, such as credit cards and loans.
These lenders were Barclays, Halifax, Nationwide and TSB. They tended to ask about how much was outstanding on each BNPL arrangement and whether this debt would be repaid in full before the start of the mortgage term.
This is not to say that the other lenders who did not ask about BNPL borrowing in this initial DIP stage would not do so later on, as it could affect your formal application later on in the homebuying process.
Several of the lenders asked by Which? confirmed that they looked for BNPL commitments when analysing bank statements. Some BNPL providers will also appear on your credit report.
Whether it will affect your mortgage chances depends on how much is still owed, the monthly repayments, when the debt will be cleared, and how reliant you appear to be on this form of short-term credit.
Reliance on short term loans like BNPL may indicate to lenders that you are unable to effectively manage your money from month to month, and that you have poor money management and budgeting skills, which can be a red flag.
If you are ever unsure about what could affect your mortgage options or finances in general, you should contact a regulated and qualified financial adviser or mortgage adviser.