Shoppers warned against ‘Buy Now, Pay Later’ schemes as they could trigger a ‘debt crisis’ - what you need to know

Monday, 30th November 2020, 1:34 pm
Updated Monday, 30th November 2020, 1:34 pm

As the countdown to Christmas kicks off, shoppers are being warned by debt charities against using Buy Now, Pay Later (BNPL) schemes when doing their online shopping.

Payment firm Worldpay has found an increase in those aged 30 to 54 using BNPL schemes when buying items online.

The research reveals that a fifth of older people are more likely to spend money at a retailer if a BNPL option is available.

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This is in comparison to the 12 per cent of younger people, aged 18 to 23, who said that they would use the service to help them afford items.

Debt charities state that the increase in shoppers using BNPL services could trigger a debt crisis as customers can easily overestimate what they are able to afford.

Buy Now, Pay Later explained

BNPL services allow shoppers to buy an item on credit, and then pay for it later. Usually these later payments are spread out over a number of months.

There are a number of BNPL schemes, with popular companies including PayPal, Klarna, Clearpay and LayBuy.

Each company has a different set of rules, such as how much you can spend under their schemes, how you repay and how much the late fees are.

While most BNPL schemes are actually interest free, the late fees you can potentially incur can often be considerably higher than your initial purchase.

Sue Anderson, from debt charity StepChange, said that BNPL debts are an increasing issue.

“These services can be a tempting source of quick and easy-to-obtain credit, but it can be all too easy to overestimate what you can afford. The reason retailers offer BNPL is because people buy more than they otherwise would.

“These services must give clear, plain English information for customers - especially those that could have the potential to see them build up debt,” she said.

Credit score impact

Research has shown that two fifths of people were unaware that Buy Now Pay Later schemes could hurt their credit score.

“Using a credit card, store card or scheme like Laybuy, Clearpay or Klarna can damage your credit score if you miss a payment and fail to repay what you have borrowed,” consumer watchdog Which? explains.

Missed payments, or failure to pay back what you owe, can be marked on your credit report and can stay there for six years.

This means that this is visible to lenders, and could hurt your chances of getting approved for future credit, such as a loan or mortgage.

You may also be reported to a credit reference agency (CRA) by the company you made a BNPL agreement with if you fail to repay what you owe, or if you miss payments.

Calls for regulations

Helen Undy, from the Money and Mental Health Policy Institute, said that BNPL schemes should be regulated in order to protect customers.

She said: “With more of us struggling with poor mental health during lockdown and spending more time online, there’s a real risk that this year’s Black Friday sales could push many people into financial harm.

“A single day’s shopping spree can cause years of misery, especially for people already dealing with both money and mental health problems.”

How can I shop safely with Buy Now Pay later schemes?

There are ways to safely use BNPL schemes - these are four tips that Which? recommends:

Set a spending limit: make sure you set a spending limit so that you don’t accidentally spiral out of controlUse reminders: set yourself reminders to track when your repayments are needing paid to ensure that you don’t miss any paymentsReturn unwanted items quickly: if you’ve received something you don’t want, or ordered multiple sizes to ensure you got the right fit, make sure you return the unwanted items promptly to ensure your balance is updated before the payment is dueCommunicate with the company: if you know you’re going to struggle to meet the repayments, reach out to the company - they might be able to freeze the late fee payments, or offer an alternative arrangement