Debt fear for hard-up
BUY now, pay later schemes have rocketed in popularity as Britons put purchases on credit to survive the cost-of-living crisis, but this type of borrowing remains hugely controversial.
Financial experts are warning that more people will turn to this easy form of credit to survive the costs crunch, only to build up even more debts.
News that technology giant Apple will include a buy now, pay later (BNPL) service as part of its new operating system is adding to the concern.
Swedish lender Klarna only launched the UK’S first scheme in 2016, but last year a staggering 17 million used BNPL to shop online.
Younger people are particularly keen on BNPL, as they routinely use it to buy cool clothes, whizzy technology and other consumer goods.
Nearly half of 16-24 year-olds use it, according to Student Beans.
Unlike a credit card or overdraft, there is no interest to pay and no charges, making this appear a hassle-free way to spread the cost.
There are no credit checks when you take out BNPL, which makes borrowing even easier. It allows you to buy items there and then, and not pay on the day.
Lenders pay the retailer on your behalf, then you typically make three monthly
repayments, spreading the cost to help with cash flow.
There is no interest to pay, no late fees and no compounding interest.
Instead, the lender makes money from affiliate deals with retailers. Lenders say this is fairer and less expensive than credit cards, which charge APRS of more than 20 per cent to those who do not clear their debt in full within 55 days.
BNPL is a handy way to spread the cost of big one-off expenses, says Hargreaves Lansdown senior personal finance analyst Sarah Coles: “Being able to pay in instalments without interest on top is a welcome alternative to credit or store cards.”
The monthly payments can be hefty and must be budgeted for, but many will not in the rush to buy luxuries they could not otherwise afford. “When people pay in instalments, they focus on the size of the first payment rather than the overall cost,” Coles added.
Worryingly, one in 12 now use it to cover essentials such as food and toiletries, Citizens Advice warns.
Like any form of credit, you still have to repay the money. If you do not, you face being pursued by debt collectors.
More than half of Britons do not even realise that BNPL can lead to debt if you miss a scheduled payment, according to loans firm Creditspring.
Co-founder Neil Kadagathur said
BNPL risks being the newwildwest of the borrowing industry: “Borrowers are in real danger of falling into another credit trap as they rely on this as a crutch to struggle through until payday.”
From this month, Klarna will report customer activity using its services to credit reference agencies Transunion and Experian. Borrowers who fail to make payments on time could damage their credit score, said Brean Horne, personal finance expert at comparison site Nerdwallet. “This will hit their eligibility for mortgages, car insurance, bank loans and utility bills,” he said.
Garrett Cassidy, at mobile money app Monese, said BNPL borrowers must make all of their monthly payments on time and beware taking out several lines of credit within a short period. “Do not use BNPL as a quick fix,” he warned.
BNPL is not regulated but that will soon change and Myron Jobson, senior personal finance analyst at Interactive Investor, said it cannot happen soon enough. “BNPL schemes can be a banana skin for those embroiled in debt.”