Should I worry about ‘Buy Now, Pay Later’?

If you’re thinking of applying for a mortgage, it’s always been important to get your personal finances in order, and there are more credit temptations than ever before.  Credit cards, personal loans, car finance and payday loans have been with us some time, but in this article we take a closer look at the rise of “buy now, pay later” schemes for everyday retail purchases.

Buy now, pay later schemes are becoming increasingly popular as firms such as Klarna and ClearPay partner with large online retailers ASOS and JD Sports, as well as many others. According to Statista, the usage of the Klarna app more than doubled between March and July of 2020, hitting over 460.000 monthly active users in the UK alone.

The promise of try-before-you-buy allows consumers to make their order and send back any items they wish to return before making any payments, which reduces the need to wait for refunds to clear before making further purchases. With Klarna in particular boasting zero interest, customer fees or late charges and making their money through merchant transaction fees it’s understandable that customers are flocking to use the service.

If it sounds too good to be true, that may mean that it is. What some consumers may not realise is that if they fail to clear their balance not only will their credit score be adversely affected but their debt can be passed on to debt collection agencies.

The consequences of missed payments vary wildly between different mortgage lenders, and as this specific type of loan is so new to the market, the lack of regulation means that the associated fees and rates don’t need to be presented up front in the same way as with credit cards.

Which? is calling for full regulation of these firms, as people are driven to spend more than intended, and more than they can afford, subsequently falling into debt.

Research from Which? showed that nearly a quarter (24%) of users of these plans paid more than they intended to, and over one in 10 (11%) reported that they suffered late charges as a result.

Interestingly, 26% of users reported that they had not planned to use a buy now, pay later plan at all until it was presented to them as an option at checkout. 18% claimed they used the plan as a result of being offered a discount for doing so.

While these services do have their benefits for consumers, it’s important for consumers to also be aware of the risks associated with accruing debt. If you have any concerns about these topics, especially when it comes to getting a mortgage, please feel free to reach out for advice.