MILLIONS of shoppers now use buy now pay later services.
Unlike traditional borrowing, such as credit cards, BNPL is interest-free.
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But it has risks, as many providers are unregulated, meaning shoppers don’t get the same level of protection as with other forms of credit.
Charities and experts are warning that some customers could end up in unaffordable debt and today we look at the industry – and the dangers shoppers face in the run-up to Christmas.
THE BIG PLAYERS
KLARNA, Clearpay and Laybuy are the main suppliers. Klarna allows customers to pay for goods in full up to 30 days later, or split it into three interest-free installments.
Clearpay customers can pay in four interest-free installments over six weeks, and Laybuy lets its customers spread the cost over six weekly payments.
TOP SHOPS
HUNDREDS of retailers such as Asos, Benefit and even B&M offer BNPL as a payment option, while brands such as H&M, New Look and The Range allow customers to borrow through BNPL providers at their in-store tills.
Klarna has started working with Deliveroo to offer BNPL on takeaways, and very.com is advertising its ‘VeryPay’ BNPL option for Christmas shopping.
Banks including Monzo and Barclays offer their own versions.
THE PROBLEMS
CUSTOMERS usually only go through a ‘soft’ credit check which leaves no footprint on your credit file so other providers will not see if you have borrowed money in this way. This is why it is easy to collect debts with different companies.
Even though BNPL is advertised as interest-free, you may still be charged late fees if you miss payments. Your debts can also be forwarded to a collection agency.
Clearpay, for example, charges £6 for a missed payment and a further £6 if it is not paid within a week. But the fees will never exceed 25 percent of the cost of the order. Laybuy also has a £6 missed payment fee, plus a further £6 if still unpaid after a week, capped at £12.
Klarna does not charge late fees.
Monzo starts charging 25 percent interest if you don’t pay within seven days of missing a payment. Barclays does not charge but it will affect your credit score.
Some BNPL companies, including Klarna, tell credit bureaus about late payments.
One agency, TransUnion, shows BNPL usage in its reports, while Experian and Equifax plan to do so this year, but it won’t yet affect your score.
Shoppers also miss out on major consumer protections that come with traditional credit.
GOVERNMENT IS COMING
EXTRA protection for shoppers has been put back until the end of 2023.
The Financial Conduct Authority can force companies to carry out extra affordability checks and you may have the right to complain to the Financial Ombudsman Service.
BNPL companies say they welcome regulation because they want to support their customers.
Some BNPL services, usually those offered by banks, are already subject to regulation. These include Monzo Flex and Installments by Barclays.
CHRISTMAS ALERT
BORROWING money to keep the kids happy may seem like the only option, but be aware of the consequences if you can’t pay back what you owe. If you need to borrow, through BNPL or a credit card, do so only for emergencies like repairing a boiler.
But it is important to ask yourself whether you really need to borrow before deciding on a new credit card or personal loan.
If you can’t afford to pay off a current debt, avoid taking on more debt at all costs.
ALTERNATIVE
BEFORE you use BNPL, consider your options – and find the cheapest way to borrow. If you already have an interest-free credit card or overdraft, consider whether this is the best way for you to spend.
Another option, which may suit those with low scores, is to use a credit union, whose rates are capped at 42.6 percent.
CASE STUDY 1
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MAT researcher Phoebe Millican started using Klarna in 2017 to shop through Asos.
The 23-year-old, from Kettering, Northants, used both the pay-in-30-day option and the pay-in-three payment method.
Millican said: “I had an overdraft at the time and clothing costs would usually get me into this.
“But being able to borrow interest-free cash through Klarna meant I could pay off after I got my salary, so I didn’t have to crawl into my overdraft and pay any fees.”
She now uses it two to three times a month and found it very useful when she bought her first home in 2021.
She said: “My mortgage payments and utility bills were eating into my monthly wages, but Klarna allowed me to plan ahead when I didn’t have cash and order items I needed for my new home.”
Millican used Klarna to order a new sofa and TV but made sure to calculate that she would be able to afford her payments at a later date.
She said: “I still make sure I use my credit card for big purchases like holidays to ensure I get Section 75 protection in the unlikely event the airline or travel agent goes bust.”
A Klarna spokesman said “we only lend to those who can afford to pay back”.
CASE STUDY 2
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PETER Blyth, a retired businessman, had never heard of Klarna until he received a letter from the company claiming he owed £854.
He learned it was for purchase from online retailer Choice Store in May.
But the 69-year-old from Milton Keynes has never been a Klarna customer.
He found out that a fraudster had used just his name and address to create an account.
Peter said: “What shocked me is how a fraudster can open an account with very limited information.”
For an account, you only need to enter your name, email address, address and phone number. Then you need a billing address and a debit or credit card to make a payment.
Thankfully, Mr Blyth’s payment details had not been linked to the account.
A Klarna spokesperson apologized to Peter and confirmed that the account in his name had been closed.
No points were placed on Peter’s credit report.
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