Don’t get burnt using buy now, pay later
BUY-NOW, pay-later (BNPL) deals have become a voguish new way to pay for clothing and other online purchases during the pandemic. A report released this week by the Financial Conduct Authority (FCA) reveals that one in 10 shoppers has used this payment method. Having the ability to “pay later” always sounds attractive, but the FCA also highlights some significant issues within the BNPL sector and, as a consequence, says the sector urgently needs to be regulated.
HOW DOES BNPL WORK?
If the retailer or trader is signed up to a BNPL firm you are provided with the option to pay for your items in instalments or, in some cases, defer payments for up to 30 days. This option is now available with many big clothing brands, including ASOS and Boohoo. When you use BNPL, you enter into a finance agreement with one of the BNPL operators, like
Klarna, Clearpay, or LayBuy.
WHAT ARE THE PITFALLS?
The BNPL sector is currently unregulated, meaning operators have no obligation to carry out affordability checks that ensure consumers can make the repayments. While recognising BNPL as convenient, Chris Woolard, who led the FCA report, said it was “a really easy way to fall into problem debt”. When you enter into a BNPL arrangement, the debt does not show up on your credit report, meaning it is invisible to other lenders. Sounds good, but it isn’t. It distorts your financial picture, making it difficult for other lenders to properly assess what debt you can afford, putting customers, particularly young shoppers, at risk of being led into further, unaffordable debt. Plus, because the sector is unregulated, complaints about a BNPL operator cannot be taken to the Financial Ombudsman.
AND THE ADVANTAGES?
For those that can afford repayments, BNPL is very convenient. It is also a useful tool for shoppers who tend to order lots of goods online and then return items they do not like or that do not fit.
In these circumstances, so long as the goods are returned within 30 days, you have not paid a penny and will not have to wait for a refund.
SO WHAT WILL REGULATION CHANGE?
Consumers will go through an appropriate affordability check before being approved, and they will be able to turn to the Financial Ombudsman Service if they fall into dispute with an operator.