No two words put us more on edge than “guaranteed approval.” So, let’s nip this in the bud: it’s not impossible to get guaranteed approval when you shop with checkout finance, but you should be wary of anyone offering to provide Buy Now, Pay Later (BNPL) with guaranteed approval.
To explain why this is the case, let’s run through how BNPL works and why Buy Now, Pay Later loans with guaranteed approval may be too good to be true.
Can you get guaranteed approval with Buy Now, Pay Later?
There are a great number of Buy Now, Pay Later providers in the world. So, when you get to the checkout of your favourite shop or ecommerce store, you may find several providers waiting to offer you Buy Now, Pay Later.
Some will refer to their products as ‘checkout finance’ or ‘retail finance’. Others offer to let you ‘split the cost’ or ‘pay in three/four/etc.’ If you’re purchasing a high-value item, you may be offered Short-term Interest-free-Credit.
Whatever they prefer to call it, these offers all have one thing in common: they are loans designed to help you fund the cost of your shopping, with repayments made in weekly or monthly instalments. Make no mistake: these are genuine credit products that could impact your credit rating.
To help you visualise how a BNPL loan works, it’s important to understand there are up to four parties involved in every Buy Now, Pay Later transaction:
- The customer is the one making the purchase
- The merchant or retailer is the one selling and shipping the items. They advertise Buy Now, Pay Later as a way to pay at the checkout
- The platform provider facilitates this process on behalf of the merchant. They give the customer the means to apply for finance, jot down their details, then pass them over to the lender to make a decision*
- The lender is the company that finances the transaction. The lender will run a quick credit check on the customer to see if they qualify for finance. If all’s well, and the customer agrees to the lender’s terms and conditions, the lender will pay the retailer the cost of the basket, then collect repayments from the customer
* Sometimes, the platform provider and the lender are the same entity.
At the end of the day, it is the lender who provides the loan and is therefore responsible for making the decision about whether a customer will be approved. To the best of our knowledge, there are no Buy Now, Pay Later providers who explicitly offer “guaranteed approval,” although some lenders have a higher appetite for risk than others. In other words, they may be more likely to lend to customers with a lower credit score.
At Divido, the lenders we work with have a robust system of credit checking in place to vet customers at the time of their application. So, when you shop with a Divido lender, you’ll receive a quick decision about whether or not you have been approved – but there is no chance of ‘guaranteed approval’.
How do lenders vet their customers before offering Buy Now, Pay Later?
As you can see in the above process, the customer will need to be approved by a lender before being eligible to finance their purchase through Buy Now, Pay Later.
Historically, some lenders have played fast-and-loose with their approach to credit checking. Some have been accused of running no credit checks at all, which is why some customers got the sense BNPL came with guaranteed approval.
But now, after increasing pressure from government regulation, lenders tend to run at least a soft credit check. If a lender is particularly trustworthy, they will sometimes run a hard credit check.
What are the differences between these two forms of credit checking?
- Soft credit check: when a company makes a soft inquiry, they’ll receive a brief overview of the customer’s credit file. This will show them the customer’s credit score and any particular red flags. It won’t give them much detail, but it’s often enough for the lender to decide whether the customer is trustworthy. A soft credit check leaves little to no trace on the customer’s credit file.
- Hard credit check: with a hard inquiry, a lender will ask to see the customer’s full credit file. This will show them every loan they’ve taken out in the past six years, whether they repaid it on time, and whether they are a trustworthy borrower. The act of merely running a hard credit check does, in itself, lower the customer’s credit score slightly and remains on their credit file for two years.
In the past, it may have been possible for a customer to have been offered guaranteed approval for Buy Now, Pay Later. But that’s changing now.
Will new regulation make it harder for customers to get approval?
Not necessarily. But from 2023 onwards, Buy Now, Pay Later will require more stringent eligibility checks in the UK.
The British Government has laid out the first steps towards introducing regulation, which will arrive in mid-2023. One of the new requirements will be that lenders must perform affordability checks to ensure customers can afford their loans. Lenders will also need to be approved by the Financial Conduct Authority (FCA), and can be reported to the Financial Ombudsman Service (FOS).
These new regulatory changes are designed to offer vulnerable customers greater protection. Once they take effect, customers will be less likely to take out retail finance loans that they cannot afford to repay. While this won’t necessarily make it harder for customers to be approved for Buy Now, Pay Later (after all, if they can afford it, and have a good credit rating, they should have nothing to worry about) it may reduce the number of applications that are approved.
Are there specific Buy Now, Pay Later options for customers with bad credit?
Some lenders specialise in helping customers whose credit ratings have fallen below average. It’s hard to say where and when you may encounter these lenders, but rest assured there are options for customers with bad credit.
At Divido, we tend to work with Tier One lenders – established banks and retail finance organisations who operate in highly-regulated spaces – so it’s unlikely you will find Buy Now, Pay Later for bad credit through Divido.
One thing that’s important to remember is that, at the moment, repaying a Buy Now, Pay Later loan won’t improve your credit. However, if you miss a repayment or fail to repay your loan, your credit could still be impacted negatively.
When regulation takes effect in 2023, lenders may need to start reporting all loans to credit checking agencies.
Therefore, customers will benefit from improved credit scores if they repay their loans on time. So, in the future, Buy Now, Pay Later could become a way to help you improve your credit rating – but right now, that’s not the case.
In conclusion: is there such a thing as ‘guaranteed’ Buy Now, Pay Later?
All Buy Now, Pay Later providers have their own appetite for risk when it comes to lending credit.
Some are happy to lend to customers with bad credit, while others are easy-going when it comes to affordability and credit checks. But all lenders will have at least some systems in place to ensure that applicants are eligible to take out loans for Buy Now, Pay Later.
This could change with new regulation in 2023. Lenders will need to tighten up their criteria for allowing customers to apply for Buy Now, Pay Later. Stricter affordability checks and improved credit reporting will probably make it harder for customers to apply for Buy Now, Pay Later loans. It is likely that new regulations will make it harder to apply for unsecured credit at the checkout.
For now, customers searching for Buy Now, Pay Later with guaranteed approval should be very careful. Even if they can get a Buy Now, Pay Later loan with bad credit or no money down, customers must remember they are taking on the risk of a genuine loan product. If they fail to pay on time, they run the risk of penalty fees and damaging their credit scores.