It is being reported that over Christmas 2020, British consumers spent £2.3 billion using Buy Now Pay Later (BNPL) Credit facilities.
Fears are now rising, that just as Pay Day Lenders flourished after the last credit crunch, BNPL may now become the new payday lenders during this one.
What is Buy Now Pay Later?
Buy Now Pay Later (BNPL) credit is not new, although in recent years it has taken on a new life.
Examples, of Buy Now Pay Later, are catalogues and store cards, but in recent years there has been a significant growth in it by online traders, including some very well known High Street retailers.
Essentially, it is credit that you use to buy goods, but then pay for later. You essentially become the owner of the goods, but still owe the money for them.
Sometimes, the finance you receive will be interest free, meaning there will be no additional cost. However, not all deals will be interest free, or the interest free period will only be for a certain period of time. This means unless you pay it all back within the interest free period, you will pay more than the goods cost.
BNPL has taken on a New Life
In recent years, take up of BNPL has really begun to increase, as specialist finance firms have entered the market. They see Buy Now Pay Later as a growing and highly profitable area and one, which at present, is lightly regulated by the Financial Conduct Authority.
Some of the Firms that provide BNPL credit are:
This is not an exhaustive list and more and more finance firms are now entering this growing market. Many are also partnering up with everyday High Street Retailers, who are offering this type of finance to their customers when they shop online.
How does Buy Now Pay Later work?
How BNPL works is pretty straight forward. You see the item you want, usually online, and purchase it using a payment option that allows you to pay later. This may be within 30 days, or it may offer you the option to pay in instalments.
Usually, the offers will provide an incentive that allows you an interest free period for the goods. If you don’t pay the price during this period, you may then face charges.
Alternatively, it may offer you the option to repay the amount you owe in instalments, with interest being charged.
Other incentives may be, if you use this method of payment, you will receive a discount.
Another way this finance can be offered is by providing you with credit, which you can then spend online. This means you don’t need to use just one retailer, but you still will be left with a debt.
So, what is the Problem?
First, many people may not be aware when they use Buy Now Pay Later that they are taking out a loan. They may just believe they are being given time to pay for the goods.
They, therefore, may not be aware that if they miss payments, they may damage their credit rating, as many firms will share their information with Credit Reference agencies.
Another problem is people may impulse buy, as they are freed from the responsibility of paying for the goods there and then.
Many Firms that offer BNPL also provide their services through mobile phone apps , so using these services can be very easy, meaning many will not appreciate the consequences of what they are doing.
What are the Pros of BNPL
One of the main benefits of Buy Now Pay Later, however, is they allow you to purchase the item you want now, when you want it, meaning you don’t have to wait.
Also many BNPL lenders have a more relaxed view when it comes to Crefit Scores and previous borrowing history, so it can be available to people with a very poor or thin credit file.
Using this type of credit also means, you can avoid using other credit, such as that provided by overdrafts and credit cards, which may cost more and be preferable for other reasons. You may not have the credit available or it may allow you to avoid over-utilising your existing credit, as this in itself can damage your credit score.
Another benefit is under the UK’s Consumer Contract (Information, Cancellation and Additional Charges) Regulations 2013, where you buy goods online or by mail order, you can return the items, even if they are not faulty, within 14 days (providing they were not made to measure).
Some firms may also offer longer “no quibble” return periods when you buy using BNPL.
Where you do return the items, the Seller should refund the account that was used to purchase the item and this should be reflected in the balance you owe the finance provider.
What Are the Cons?
The down side is BNPL is debt, like any other debt, so if you cannot pay it, it can become a problem.
Also the ease in which it is being offered has been compared with how store cards used to be offered at the point of sale, which has now been banned.
It is too easy to get to the checkout and then just use the alternative payment method that is being offered.
You get to keep your money and you tell yourself you will make the payment when it becomes due. However, if you don’t, you may end up paying more.
Also BNPL is now being offered for more and more different goods and services. Some, like groceries, are essentials.
It is, therefore, foreseeable that people may use it, not just to buy luxury items, but also to buy essential items like food, when they are short in cash.
They may then struggle to make the payment when it is due or if they do make it on time, use any money they have for buying food and have to use it again to buy their next shop. This is very similar to the Roll-Over business model that Pay Day Lender used to use.
Also, as other high cost creditors, such a Pay Day Lenders and Rent to Buy firms have become more heavily regulated, because of the harm they caused, it is feared BNPL Lenders may fill the gap that has been created in the market by their demise.
Are BNPL Regulated?
Some BNPL agreements are regulated by the Consumer Credit Act 1974, but some may not be. Where the firm doesn’t charge interest or any significant charges for the credit and the debt has to be repaid in 12 or less instalments, the agreement may be what is known an an Exempt Agreement.
However, as many of the transactions are for small amounts it it easy for people to get sucked into using them.
Also, like with all debts, it may not take long before a number of small debts, added together, amount to a large debts.
Once people start missing payments, they may also then have interest and charges added to their debts and their credit rating may be damaged.
People, therefore, should be cautious about using Buy Now Pay Later credit. Like all Credit, if used responsibly, it can be useful; but equally it is designed to be easy to access and Firms don’t seem too concerned about the affordability of what they are offering people.
It is highly likely, therefore, that in years to come, BNPL credit, like other forms of Credit will end up becoming more regulated, just as other new, innovative credit has in recent year.