Millions of people in the UK use buy now pay later services that let you delay payment for products. Providers of these services that you may have heard of include Klarna and Clearpay. But while providers are keen to sell you the benefits, remember that where there are upsides, there are downsides too.
So, before you click to ‘buy’, here are the potential dangers of buy now pay later and what you can do to avoid them.
Late fees and debt collection
Buy now pay later might help spread the cost, but it’s still a type of credit. That means deferred payments need to be paid back at some point.
If you can’t make those payments, the consequences can include hefty late fees that vary by service provider. In some cases, you could even end up with debt collectors knocking on your door. Worryingly, that scenario is already a reality for many consumers.
Research by Citizens Advice revealed that one in three shoppers using buy now pay later missed payments or made them late. One in ten users had been chased by a debt collector. Of those struggling to pay off buy now pay later payments, more than half (54%) had to borrow more to pay off their debts.
Needless to say, this can lead to a downward spiral of debt chasing.
Buy now pay later can affect your credit score
One upside of buy now pay later is the soft credit check. It’s a point that providers are keen to stress, and it means your credit report won’t show an application for credit.
Many consider this a benefit because too many applications for credit are a red flag for lenders. However, it doesn’t mean your credit report goes completely unscathed.
If you miss a payment, it can show up in credit checks and could affect your access to credit in the future.
No Section 75 protection
If you use a credit card to buy items costing between £100 and £30,000, you’re protected under Section 75 of the Consumer Credit Act 1974. It means that if something goes wrong, such as the product being faulty, you can get your money back.
But Section 75 rules only apply in specific situations. The purchase has to show a clear link between you, the credit card company and the supplier. For instance, if you buy a washing machine from an electrical store using your credit card, you’re covered.
Using a third party (like a buy now pay later provider) means the direct relationship described above is broken. So, if you buy a washing machine using buy now pay later and the retailer goes bust before it’s delivered, you can’t seek compensation under Section 75.
Buy now pay later is currently unregulated
Earlier this year, the government announced that buy now pay later providers are to be regulated by the Financial Conduct Authority (FCA). The aim is to ensure service users are treated fairly and can get help if they face problems.
Regulation also means that buy now pay later providers will need to run proper affordability checks. Citizens Advice found that just 11% of providers made it clear that customers were signing up for a credit contract.
While this is a positive step, the FCA says it expects there to be a consultation period. With that in mind, there’s no word as to when such regulation might begin.
Takeaway: how best to use buy now pay later
Used sensibly, buy now pay later can be a convenient way to buy items you need before payday arrives. But as with any credit agreement, there are golden rules. One of them is to never miss a payment.
The financial decisions we make are highly personal. And there are situations where buy now pay later provides a handy and much-needed service. The key is staying on top of payments and knowing when to stop.
If you do need to buy essentials on credit, it’s a good idea to weigh up the pros and cons of buy now pay later against traditional credit.
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