The dangers of buy now, pay later schemes
Demand for ‘buy now, pay later’ deals have soared among all age groups in the UK, who find themselves squeezed by the cost of living crisis and in need of short-term credit. Alice Beer outlines the risks, including whether they could harm your credit rating, and why you should think twice before using them to purchase your takeaway.
What are buy now, pay later schemes?
'Buy now, pay later' (BNPL) schemes are a form of short-term credit. Typically, the schemes allow you to pay for items in instalments or in one repayment at a later date, interest-free.
How popular are BNPL schemes?
A recent report found that 'buy now, pay later' usage hit an all time high over Christmas, with 34% of UK shoppers using the service to spread the cost of purchases.
The research also revealed that one in three Brits have now used BNPL services, up from 26% in November 2021.
You can even pay for your takeaway using BNPL schemes...
Buy now, pay later' has become an option across the market when paying for all sorts of goods - even a takeaway via Deliveroo.
However, finance experts have branded Deliveroo's addition of BNPL service Klarna as 'irresponsible' - saying customers should not be racking up debt for a takeaway.
The move has also been condemned by Labour councillor, Rosie Parry who said: 'If people can't afford to eat without going into debt, society is failing'.
How does BNPL compare to a credit card?
Although they're both a form of credit, BNPL schemes work differently from credit cards. There are three main differences:
Credit Checks: With a standard loan or credit card, lenders will complete a "hard check", which shows on your credit history. BNPL firms have typically only carried out "soft checks" which are not as stringent.
Protection: When using a credit card, purchases have 'section 75 protection'. This means your bank is jointly liable if anything goes wrong with purchases worth over £100 and up to £30,000 made on your credit card. BNPL schemes are not protected under section 75.
Regulation: BNPL schemes are not regulated by the ombudsman.
What are the dangers of buy now pay later schemes?:
Buying beyond your means.
Failing to make payments.
No support if the retailer goes bust.
Getting a bad credit record.
How can they impact your credit score?
Consumers will find missed BNPL payments appearing in their credit reports next year, so it's vital that anyone using it sees it as the credit product that it is.
What BNPL regulation is coming in this year?
Regulatory changes that will affect most BNPL schemes will come into play in the middle of this year. Changes are thought to include:
BNPL providers need to be approved by the regulator
Lenders must ensure loans are affordable
Advertisements must be fair, clear and not misleading
Other short-term interest-free credit to be included
Consumers to be able to complain to the ombudsman
When should you think twice about using BNLP?
Are you buying something you could afford without credit?
Can you make the payments?
Is it the best way for you to be paying?