There’s a good chance you’ve seen the term “buy now, pay later” while you’re shopping online. Services such as Klarna allow you to split the payments for a purchase over several months.
While short-term loan schemes have been around for a while now, they have certainly risen in popularity in recent years, especially among younger generations.
Indeed, Forbes reports that 18- to 24-year-olds have been the most reliant on buy now, pay later commitments, with 80% increasing their monthly debt.
At first glance, this may seem like a brilliant option. You don’t need to spend the whole sum all at once, any money you borrow is typically free of any interest, and you still benefit from your desired purchase almost immediately.
Despite how attractive these schemes may seem at first glance, it’s worth considering that short-term loan commitments like these could affect your chances of getting a mortgage. In fact, if a lender believes you have unhealthy spending habits, they may reduce the total amount of money they offer, or deny the loan altogether.
So, continue reading to find out exactly how buy now, pay later schemes work, and how they could potentially affect your ability to obtain a mortgage.
Buy now, pay later allows you to spread out payments for purchases
As the name implies, buy now, pay later schemes enable you to spread out the cost of a purchase over several repayment periods.
You’ll likely have seen providers such as Monzo, Klarna or PayPal offer this option. While some shopping websites may offer the agreement at checkout, this is usually through a separate credit provider, not the retailer itself.
When you use the scheme, you typically don’t pay interest or charges on the amount you borrow if you meet the regular repayments. Also, most buy now, pay later companies only require a “soft” credit check rather than a “hard” one, meaning the request won’t appear on your credit file if you’re turned down.
It’s important to remember that not all debt is inherently bad – a mortgage is a form of debt, after all. However, there’s a chance that spending through buy now, pay later schemes could affect your ability to get a mortgage. Continue reading to discover why this is.
Lenders could see short-term borrowing as a red flag
The Times reports that Klarna and Laybuy, two popular providers, have both started sharing their customers’ data with credit-reference agencies. In March 2023, Klarna also began charging fees for late payments on its “Pay in 3” and “Pay in 30” offerings.
Having outstanding short-term loans could indicate to lenders that you don’t know how to responsibly manage your money from month to month. And, if you use these schemes regularly, lenders could think you have poor money management skills, and may question your ability to pay back your mortgage.
As such, a mortgage lender could reduce the maximum amount you can borrow, or even deny the application altogether if they feel the risk is too great. This could be especially true if you have other red flag indicators on your credit file, such as a frequently overdrawn bank balance or outstanding balances on credit cards.
It’s important to remember that missed repayments on a buy now, pay later scheme could remain on your credit file for up to six years, affecting your credit score.
Keep in mind that lenders tend to make a distinction between short- and long-term “buy now, pay later” arrangements. For instance, you’ll likely pay off a £50 purchase deferred across 30 days by the time you’re granted your mortgage.
Meanwhile, lenders could view a £500 debt commitment split across six separate payments more seriously, as this could significantly affect the amount of money you have available each month.
Generally, lenders will examine several factors of your buy now, pay later commitment to determine your saving and spending habits. These include:
- The outstanding amount
- How much you repay each month
- When you will pay off the debt.
Using these criteria to decide whether you’re too reliant on short-term loans means the lender could offer you a smaller mortgage as a result.
Remember: lenders don’t necessarily blacklist buy now, pay later schemes, as they will take a complete view of your financial situation before making any decisions. Though, multiple short-term debts could force the lender to request more information, slowing down your application.
There are steps you can take to maximise your chance of obtaining a mortgage
Generally, it may be worth avoiding entering into any credit agreements before applying for a mortgage if possible. Also, paying off any short-term debt before you submit a mortgage application or request an agreement in principle could also be prudent.
This may seem slightly more apparent, but if you do have existing buy now, pay later commitments, you should keep up with any repayments. Otherwise, credit reference agencies will likely record these missed payments on your file, which may concern lenders.
“Like other credit, missed payments could result in extra charges and could, in time, affect your creditworthiness in the eyes of other lenders,” explains James Jones at credit reference agency Experian.
And, when you’re applying for an agreement in principle, you should be honest on your form and disclose any short-term commitments you have. Not only will this give the lender a complete picture of your borrowing, but it could also boost your chances of mortgage approval.
If you’re still unsure whether your short-term borrowing habits could affect your chances of getting a mortgage, you should seek advice from an expert.
Get in touch
Before getting involved with buy now, pay later schemes, or any other forms of short-term debt, it’s always worth speaking to a mortgage expert to ensure it won’t affect your long-term borrowing ability.
Please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.