With buy-now-pay-later (BNPL) firms beginning to dominate online purchases, we think it’s important to give you all of the facts about them so you can make informed choices
Why do people use BNPL financing?
The option of BNPL can be very tempting to consumers as it means they don’t have to pay for things in one lump sum payment
Customers can spread out payments instead to make purchases more manageable. This can be good for those who know they have a steady income coming in. For example, if you don’t have the money for those new shoes now, but know you will definitely have your wages coming in every Friday, you may choose to finance them on BNPL
BNPL firms are a form of credit
BNPL isn’t marketed as a credit or debt, and it really should be, and also should be regulated as such
Many people using these firms are unaware that it is a form of credit and that missing repayments has consequences. Many of these firms have late fees that occur when customers miss repayments. Klarna is one of the BNPL services that does not have these late fees, instead allowing a grace period for missed payments. If you still miss payments, they may then set up a new payment schedule with you
However, if Klarna can’t get into contact with you after multiple attempts, you risk them deferring to a debt collection agency. This is the risk with any of these organisations. At the end of the day, things don’t come for free; you will always be expected to eventually pay for a purchase
Missing repayments can also affect your credit report!
Any information about missed payments will stay on your credit file for 6 years. Therefore, buying those shoes that you couldn’t quite afford through BNPL could ultimately affect your ability to:
- Get a mortgage
- Rent a property
- Get a mobile phone
- Get a job
- Buy a car
The dangers of BNPL
According to a recent Citizens Advice survey, over 42% on BNPL customers used some form of borrowing to repay their purchases over the last 12 months
Simply put, BNPL financing encourages overspending, rather than spending within your budget. It is leading to people stretching themselves too thin; financing your purchases through BNPL will only serve to create future stress of repayments hanging over your head
You don’t know how your financial situation may change, even just over the course of a week or a month! What if you face an unexpected expenditure, such as your car breaking down? You can’t predict the future, so it is always best to err on the side of caution, building savings wherever possible so that these financial surprises don’t hit you as hard
Future government regulation
On 20th June 2022, the UK Government announced plans for regulating BNPL firms. Under this new legislation:
- Lenders will have to perform affordability checks to ensure that customers can keep up with repayments
- BNPL firms will have to ensure their advertisements are clear, fair, and not misleading for customers]
- The Financial Conduct Authority will have to approve lenders
- Borrowers will be able to access the Financial Ombudsman Service for complaints. This is a free service that settles complaints between consumers and businesses
Need help with your debt?
There are certain debt charities and organisations that can help you manage your debt by providing you with free advice, such as: