Why 'Buy Now Pay Later' schemes are misleading

As if Britons didn’t already have enough ways of racking up new debt, we now have the choice to ‘Buy Now Pay Later’ as well. Buy Now Pay Later, or BNPL, has attracted millions of shoppers with the promise of interest-free credit.

An incredible 45 per cent of 18-24 year-olds turned to BNPL in the last year, according to The Money Charity. Lenders say they offer a better deal than credit cards, because they do not charge interest but make money from affiliate deals with retailers. It may be a new way of borrowing money but the old rules still apply: unless you repay the debt quickly, you are building up trouble for the future.

Buy now

Swedish BNPL firm Klarna app-based account is the best known, while Affirm, Clearpay, Laybuy, Zilch and Australian firm Zip are also active. Lenders pay the retailer on your behalf, then you repay over 30 days or three months, spreading the cost to help with cash flow.

They say this is fairer and less expensive than credit cards, which charge APRs of more than 20% to those who do not pay within 55 days. That may be true but BNPL has dangers too.

Pay later

BNPL lenders may not charge any interest, but they still want you to pay back the money you have borrowed so what if you can’t? Typically, you have 30 days to settle your invoice. If you don't pay, your lender will contact you to chase late payments. If you still don't pay, they call in the debt collectors. That is to be expected.

Any organisation that lends you money will want it back, and will pursue you if you cannot repay it. However, campaigners fear that all the talk of interest-free instalments and no hidden fees mean shoppers don’t understand the danger.

Credit quicksand

Citizens Advice says that 14 million used a BNPL product in the last year, but six million did not understand what they were signing up for. Some 26% of BNPL customers regretted their choice, while a hefty 41% struggled with repayment.

Younger people were particularly vulnerable. A quarter of those making BNPL repayments couldn’t afford food, rent or bills as a result. Citizens Advice said BNPL was “like quicksand—easy to slip into and much more difficult to get out of”.

Despite the danger, City watchdog the Financial Conduct Authority has yet to regulate BNPL, even though Worldpay estimates it will account for one in 10 of all sales by 2024.

Poor quality credit checks

Another worry is that BNPL lenders only perform ‘soft’ searches on a person's credit report, so do not see the borrower’s true credit status. This means they cannot filter out people with financial problems, and may end up adding to their troubles.

BNPL lenders say they do careful checks to make sure they never lend more than a consumer can afford to pay back, and pause accounts if a single payment is late. Nobody wants to be pursued by debt collectors. If you do use BNPL credit, never borrow more than you can afford to repay.

Read more: How to help your kids buy a home

Read more: 7 signs you're a shopping addict

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