Buy now, pay later warning over Christmas shopping that could lead to horror debt
SHOPPERS have been warned not to use buy now, pay later this Christmas over debt concerns.
With Christmas around the corner and people’s pockets stretched in the cost of living crisis, many might be tempted to turn to borrowing money.
Buy now, pay later (BNPL) firms let shoppers buy items on credit and pay for it at a later date.
Payments are usually spread out over several months, but some firms also ask shoppers to pay the full balance by the next month.
But experts have warned using BNPL to buy presents and other festive treats could land people in serious debt later on.
And it could leave you with less protection as they are not yet fully regulated in the same way as credit cards.
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Andrew Hagger, personal finance expert at MoneyComms said: “While it may solve a short-term cash flow problem this Christmas, it could lead to debt issues down the line if the BNPL repayments become unaffordable.”
People could end up borrowing too much and be unable to keep up with repayments, he said.
They could also end up turning to more expensive forms of borrowing like a credit card to cover the costs.
While BNPL is usually interest-free for a certain period, you’ll be charged monthly interest on a credit card.
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The average rate is 29.8% but the exact amount depends on the card you have and the rate you can get. Those with worse credit scores are often charged higher rates.
Sara Williams, founder of Debt Camel said: “Interest-free BNPL can sound so attractive with Christmas coming up fast, as it looks like it’s not a real form of debt – but it is.
“And the short repayment periods often don’t give shoppers much time to pay what they owe back – especially if you have been paid in early December when it’s hard getting through January anyway without any extra BNPL payments.
“So you end up paying the BNPL on a credit card and the BNPL has become a slippery slope into too much debt. It’s better to set a budget for Xmas and stick to it.”
You should really only turn to borrow money for emergencies like a boiler or vehicle repair.
Matthew Upton, director of policy at Citizens Advice, also warned of the fewer protections offered by BNPL.
You can’t take advantage of Section 75 protection, which can help claw back their cash in the event that the item purchased never arrived or didn’t come as intended.
And customers can’t complain to the Financial Ombudsmen Service if they have an issue with the BNPL provider.
He said: “As living costs spiral, more people in desperate situations will see BNPL – with its patchwork of rules and protections – as the answer when in reality they are being left unprotected and ill-informed.”
The warnings come after The Sun spoke to one shopper who was left £1,500 in debt and homeless after splurging on BNPL.
Cash-strapped admin assistant Tabby Smith, 24, could not afford a £60 Asos dress.
But with BNPL app Klarna, she decided there was no harm in treating herself.
In the end, the move left Ms Smith saddled with debt and meant she had to move back home with her mum.
We’ve already explained how to avoid the risks of BNPL services as Christmas approaches.
How can I avoid falling into a debt trap this Christmas?
The first thing you should do is assess your financial situation and don’t be afraid to let family and friends know that you need to cut back this Christmas.
Mr Hagger said: “If you’re struggling for cash this year explain to your friends and family that you’re having to cut back this Christmas – most will understand as they will be in the same boat – it’s simply not worth getting into debt over.”
If you do need to borrow, be it through BNPL or a credit card, only do so if it’s for emergencies like a boiler repair or vehicle repair.
But it’s vital to ask yourself if you actually need to borrow before committing to a new credit card or personal loan.
Before using BNPL, think about your options – and find the cheapest way to borrow.
If you already have a no-interest credit card or overdraft, consider whether this is the best way for you to spend.
Another option is using a credit union, whose rates are capped at 42.6 per cent.
While these rates are still higher than those offered by the best credit cards and personal loan deals offered by major lenders, they are more accessible to people with bad credit.
Credit unions also carry no hidden charges, so if you want to pay off your loan early, you can without a fee.
Remember, credit should only be used if you can afford to pay it off and credit cards should be paid off in full each month to avoid interest charges.
What is buy now, pay later?
Unlike traditional borrowing, like credit cards, BNPL is interest-free and some providers don’t even charge customers fees for making late repayments.
Klarna, Clearpay and Laybuy are the biggest BNPL providers in the market.
With 16million regular users, Klarna takes the top spot.
Shoppers can pay for items in full up to 30 days later, or split the cost into three interest-free instalments.
Customers won’t face any late fees if they haven’t made a payment within seven days of the due date.
But if you can’t pay up after seven days you’ll be moved onto an interest-paying plan at 25% APR.
Clearpay serves two million customers and allows them to shop now and pay in four interest-free instalments over six weeks.
Customers who miss their repayments will be charged £6 and for orders over £24 late fees are capped at 25% of the total order cost or £36 – whichever is less.
Laybuy serves half a million customers and allows them to spread the cost over six weekly payments.
Late fees can be charged twice per missed instalment and capped at £12.
Thousands of retailers offer BNPL as a payment option, including Asos, Benefit and even B&M.
In recent weeks, Klarna has started working with Deliveroo to offer BNPL on takeaways.
And Very.com is already advertising its “VeryPay” BNPL option for Christmas shopping.
What are the pitfalls of buy now, pay later?
Customers looking to borrow through BNPL usually only go through a ‘soft’ credit check.
This does not leave a footprint on your credit file so other providers won’t be able to see if you’ve borrowed money this way.
This is one of the reasons why it is easy to build up a number of debts with different companies.
Softer affordability checks also mean that BNPL providers are more likely to lend to people that traditional banks would avoid.
Improper use of BNPL credit could be your ability to be approved for credit cards or a mortgage.
Even though BNPL is advertised as interest-free, if you miss payments you could still be charged late fees and it could damage your credit file.
Laura Suter of AJ Bell previously told The Sun: “Aside from late fees adding up, users need to think about the impact of missed payments on your credit file and the fact that most debt is passed on to debt collection agencies, which can be very intimidating.”
Reporting to credit agencies varies between firms, but since June, Klarna has reported missed or late payments to Experian and TransUnion.
TransUnion says BNPL will show on its credit reports, while Experian and Equifax have confirmed they will include them at some point this year.
However, they won’t affect your credit score just yet.
What protections come with buy now, pay later?
Customers forfeit their right to Section 75 protection, which can help claw back their cash in the event that the item purchased never arrived or didn’t come as intended.
BNPL customers also can’t complain to the Financial Ombudsman if something goes wrong.
But BNPL is coming. The rules are likely to include more extensive affordability checks and extra details about the product when you sign up.
Some BNPL offerings, usually those offered by banks, are covered by the regulation – these include Monzo Flex and Instalments by Barclay’s.
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Customers will get a ‘hard’ credit check, leaving a mark and you can go to the Financial Ombudsman about problems.
The firms also report the repayment history of their customers to credit reference agencies which means borrowing here could affect your credit score.