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 does have risks, as many providers are unregulated, which means shoppers do not get the same level of protection as with other forms of credit.
Charities and experts warn that some customers can 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 providers. Klarna lets shoppers pay for items in full up to 30 days later, or split it into three interest-free instalments.
Clearpay customers can pay in four interest-free instalments 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 checkouts in-store.
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 that leaves no footprint on your credit file so other providers won’t see if you’ve borrowed money this way. That’s why it is easy to amass debts with different firms.
Even though BNPL is advertised as interest-free, if you miss payments you could still be charged late fees. Your debts can also be passed on to a collection agency.
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Clearpay, for example, charges £6 for a missed payment and a further £6 if it’s not paid within a week. But charges will never go above 25 per cent of the cost of the order. Laybuy also has a £6 missed payment fee, plus a further £6 if it’s still not paid after a week, capped at £12.
Klarna doesn’t charge late fees.
Monzo starts charging interest of 25 per cent if you don’t pay within seven days of missing a payment. Barclays doesn’t charge but it will affect your credit score.
Some BNPL firms, including Klarna, tell credit reference agencies about late payments.
One agency, TransUnion shows BNPL use on 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 rights protections that come with traditional credit.
REGULATION IS COMING
EXTRA protection for shoppers has been put back to late 2023.
The Financial Conduct Authority might force firms to make extra affordability checks and you might get the right to complain to the Financial Ombudsman Service.
BNPL firms say they welcome regulation as they want to support their customers.
Some BNPL services, usually those offered by banks, are already covered by regulation. These include Monzo Flex and Instalments by Barclays.
XMAS WARNING
WITH money tight borrowing to keep the kids happy might seem like the only option, but be aware of consequences if you can’t pay back what you owe. If you do need to borrow, through BNPL or a credit card, only do so for emergencies such as repairing a boiler.
But it’s vital to ask yourself if you actually need to borrow before committing to a new credit card or personal loan.
If you cannot afford to pay off a current debt, then avoid taking out any more debt at all costs.
ALTERNATIVES
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, which might suit those with low scores, is using a credit union, whose rates are capped at 42.6 per cent.
CASE STUDY 1
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FOOD scientist Phoebe Millican started using Klarna in 2017 to shop via Asos.
The 23-year-old from Kettering, Northants, used both the pay-in-30-day option and the pay-in-three instalments method.
Ms Millican said: “I had an overdraft at the time and clothing costs would usually take me into this.
“But the ability to borrow interest-free cash through Klarna meant I could pay it off after I got my salary, so I didn’t need to creep into my overdraft and pay any associated 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 ate away at my monthly salary payments, but Klarna let me plan in advance when I didn’t have the cash and order items that I needed for my new home.”
Ms 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 ensure I use my credit card for big purchases like holidays to ensure I get Section 75 protection in the unlikely event that the airline or travel agent goes bust.”
A spokesman for Klarna said “we only lend to those who can afford to repay”.
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 was told it was for purchases from online retailer Choice Store in May.
But the 69-year-old from Milton Keynes has never been a Klarna customer.
He learned a fraudster had used just his name and address to set up an account.
Peter said: “What shocked me is how a fraudster is able to open an account with very limited information.”
For an account, you only need to give a name, email, 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 apologised to Peter and confirmed that the account in his name had been closed.
No marks were put on Peter’s credit file.
