PayPal credit: how it works, fees, and the interest-free loan offer

If you want a cheap or interest-free loan then your options are limited – and PayPal Credit is on that shortlist.

Since 2016, the payments provider has long allowed shoppers to borrow from it to make purchases, allowing PayPal to function as an online-only credit card.

Like a credit card, if you pay your balance within a set period (56 days), you don’t get charged interest.

For purchases above £99, however, this interest-free period shoots up to four months; you just need to make minimum repayments.

What’s the catch? Well, PayPal Credit has many of the pitfalls that apply to credit cards, plus a few unique concerns.

We run through PayPal Credit’s pros and cons, and its alternatives.

Apply with caution

Most people think of PayPal as a payments provider; it takes a minute to set up an account and start shopping.

The PayPal Credit application form is similarly slick – you can receive your credit limit on the same day, unlike a credit card – but it does involve a full credit check.

Unlike the soft check used by comparison sites like loveMONEY to judge your eligibility for credit cards, a full check impacts your credit rating, even if you get approved for the product.

That could make it more difficult to get credit cards, mortgages or certain bank accounts.

A full credit check could impact your credit rating (image: Shutterstock)

Unfortunately, PayPal Credit doesn’t give an indication of whether you’ll be approved beforehand.

It does list criteria including being 18 or over and a UK resident; employed or retired with an annual income over £10,000, and to be free of any country court judgements (CCRs) or bankruptcy and to have a ‘good’ credit history.

If you have a poor credit history or plan to apply for a mortgage soon, seriously consider whether you really need PayPal Credit before risking your credit rating.

You might want to wait and build your credit history instead (here’s how).

Four-month interest-free offer

Providing you spend more than £99 in a single transaction, PayPal Credit gives you four months interest-free to pay it off.

This can save you a huge amount, because PayPal’s interest rate, although lower than some credit cards and overdrafts, is a considerable 17.9% APR.

You need to meet minimum repayments: 1% of the outstanding balance, or £5, whichever is higher, or risk £12 late payment fees, and you’ll want to pay off your entire balance before the four months end.

Getting finance at a store’s check out isn’t new, of course, and Argos, John Lewis and many others offer interest-free payment periods, many up to twelve months.

However, each of these involves filling in a form and a full credit check: with PayPal Credit you need only do this once, and not have to keep several different payment plans in mind.

Furthermore, having the freedom to shop anywhere that accepts PayPal (excluding a few gambling outlets) makes it more likely you’ll find the cheapest version of what you’re looking for.

That’s also why you should avoid rent-to-own stores, which frequently mark up the original prices of items they offer, so it’ll cost you more even if you avoid paying interest. An investigation by the FCA found an electric cooker worth £300 being sold at £1,044 with credit.

If you’re struggling with debt, here’s where you can get help.

PayPal Credit could work out cheaper than buy-to-own retailer credit (image: Shutterstock)

Compared to a credit card

If you don’t mind undergoing a credit check and want to shop anywhere, including physical shops, why not get a credit card?

The best 0% purchase cards allow you to pay no interest for up to 30 months, even on sub-£99 purchases.

There are even credit repair cards with interest-free purchases for those with a poor credit rating who wouldn’t be eligible for PayPal Credit (like this one from Marbles).

Where PayPal Credit has the edge is in its relative convenience and simplicity.

Convenience, because the application process is quick and you could receive your credit within the day, rather than waiting days for approval and card delivery. PayPal’s One Touch function makes checkout quicker than using a card.

Simplicity, because the four-month period from PayPal applies every time you spend more than £99, whereas once the initial interest-free period on a 0% purchase cards ends, you must pay interest on new purchases.

It’s also worth noting that, like a credit card, PayPal Credit provides Section 75 protection from faulty items or failing companies (unlike usual PayPal payments).

Over the long term, PayPal Credit’s limited functionality could become irritating – you can’t yet use it in physical stores or places that don’t accept PayPal, or as deposits for rental cars or hotels, for instance.

Compare 0% purchase credit cards here

PayPal scams

There are many ways to get scammed, but PayPal users are particularly targeted.

Whilst you’d usually only lose the money in your PayPal wallet, with PayPal Credit you have a credit limit of at least £250 and up to £8,000 (subject to status); the results could be disastrous.

Phishing scams, which purport to be from PayPal, could ask you to provide your login information.

If you use PayPal on eBay, also look out for overpayment and advance fee fraud.

We’ve put together a guide to PayPal scams which you can read here.