Buy Now Pay Later risks you need to be aware of

Supershoppers: Expert issues warning over 'buy now pay later'

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This month the takeaway food app Deliveroo announced it would allow its customers to use a buy now, pay later or “eat now, pay later” option when purchasing through their app. This was quickly met with heavy criticism from financial commentators, with the Money Saving Expert Martin Lewis writing on Twitter: “Dear @deliveroo do you really need to pump debt as a way to pay for takeaways?”

This sparked the conversation again as to whether it was responsible for companies to allow and promote this payment option, particularly during the current cost of living crisis, and whether the British public understands exactly what buy now, pay later is and the risk which could possibly arise with it.

What is buy now, pay later?

Buy now, pay later is a payment option which allows consumers to split payments into regular interest-free instalments rather than pay upfront.

Mike Barrow, financial coach at Claro Wellbeing, explained: “Providers let you set up a short payment plan which is usually across a few months, however, it is also possible to spread the cost over a year.”

Buy now, pay later companies make their money by taking a commission from the retailer, which means they don’t need to charge anything to customers.

Why is buy now, pay later considered controversial?

The fact that buy now, pay later is so easy to use can be a drawback as much as it is a benefit. Overall, buy now, pay later is still a debt which needs to be repaid.

Mr Barrow added: “Despite the initial appeal, easier and quicker access to unregulated credit could be catastrophic for some consumers who are already struggling with the increased cost of living.

“Buy now, pay later is quickly becoming a habit for many and is relied on by a large proportion of people who do not realise they are taking on debt.”

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Research by the financial wellbeing platform found 51 percent of 18-34-year-olds have used buy now, pay later credit and that more than 40 percent of buy now, pay later customers are using other forms of credit to keep on top of their repayments.

Mr Barrow explained that buy now, pay later credit history is now also considered as part of consumer credit scores which means delayed and unpaid debt could mean people could miss out on a mortgage loan approval if payments are missed.

Do buy now, pay later lenders carry out credit checks?

The number of buy now, pay later companies on the market is rising and some services currently offer a “soft credit check” if a person decides to pay in four days, 30 days, or chooses monthly financing which is paying over the course of six to 36 months.

A soft credit check is recorded on a credit file but won’t impact a person’s credit score and no other lenders would be able to see it.

Some lenders can carry out a “hard credit check” which does leave a mark on someone’s credit file. This would then have an effect on someone’s credit score and their ability to be accepted for a loan.

Some lenders charge the customer for missing a payment while others don’t. If the missed payments continue, after sending gentle reminders through letters, emails or texts, the lender could refer the case to debt collection as well as report it to a credit reference agency.

Is the buy now, pay later market regulated?

The buy now, pay later market, as of right now, is currently unregulated which means there are now official guidelines or rules that buy now, pay later companies need to adhere to.

It is worth noting that some buy now, pay later lenders do sometimes offer longer-term credit agreements and these fall under current financial regulations and come with interest and fees just like regular personal loans and overdrafts.

The UK Government is currently working on plans to introduce regulations which look set to come into play in the next two years.

As part of the government’s regulation of the industry, buy now, pay later lenders will need to be approved by the Financial Conduct Authority (FCA) to be able to operate in the UK.

Customers will also be able to complain to the Financial Ombudsman Service if they are unhappy with the way a buy now, pay later firm has treated them. Currently, customers can only complain directly to the firm.

Mr Barrow said: “When the changes come into force lenders will be required to ensure that loans are affordable and rules will be amended to make certain that advertisements are fair, clear, and not misleading.

“This news is encouraging but long overdue. We, and many others, have been calling for this for a long time and whilst it’s positive that the government has finally listened to these calls, it could be too little, too late.

“The Woolard Review, published in early 2021 concluded that this regulation needed to be fast-tracked to match the rise in buy now, pay later growth.”

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One of the UK’s largest buy now, pay later providers Klarna has urged the UK Government to act quicker in its steps to regulate the industry and has itself introduced strict regulations on its lending to prevent its customers from falling into unmanageable debt.

Klarna says that without regulation, consumers are put at risk from “irresponsible, unregulated” buy now, pay later providers and traditional banks disguising high-interest products as buy now pay later.

Alex Marsh, head of Klarna UK said: “As the UK’s largest buy now, pay later provider, we will continue working closely with HM Treasury and the FCA to accelerate progress and make future regulation of the highest possible standard globally.

“We make it clear in our marketing that buy now, pay later is credit, we check consumers’ ability to repay on each transaction, and we share data with UK credit reference agencies to increase visibility of buy now pay later use across lenders.”

Mr Barrow urged people considering buy now, pay later options to take the time to research the industry first, to educate themselves on the agreement they are entering.

He also recommended people look into the lender they are using and what their procedure is for late or missing payments, and how the lender will support them if they are unable to pay. 

He added: “It’s important to understand the risks and repayment terms of using this type of payment before committing to purchases.

“Without the information and education on these types of schemes, people risk damaging their future ability to gain credit, such as a mortgage or loan, and forming a reliance on credit cards, overdrafts, and borrowing from friends and family at an early age.”

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