There are seemingly endless ways in which you can borrow money these days, whether in the form of a credit card, a bank loan or taking equity out of your mortgage. As the number of ways borrowed money can be acquired rises, the ways these lenders can influence how we make payments also increase. Buy Now Pay Later is a term that most online shoppers will be familiar with, and it is a concept which has only really come into play over the last 5 years.
Buy Now Pay Later (BNPL) tends to be interest-free, however, this doesn’t always mean that the deal you are getting is a good one. Although you’re not paying interest or fees with BNPL as you would with credit cards, it is likely that you are using this flexible payment method to finance items you don’t really need, or what you can’t afford.
Although BNPL can offer a form of worthwhile financial power for some, it is important to understand that there are instances where simply clicking “Pay Later” can have serious consequences. Let’s take a look at how debt in the digital age can become a dangerous reality for consumers.
Skewed Sense Of Perception vs Reality
Klarna, one of the most popular providers of BNPL, is currently partnered with over 250,000 stores and retailers around the world. As a result, you can use BNPL for a range of services and products, but in a lot of cases, you don’t even need to download an app or sign up for the services – just a few taps and you’re good to go with your new purchase in hand.
This lack of accountability is what can cause a skewed sense of perception vs reality. If purchases feel too easy to make and almost free, then it encourages the buyer to keep on making these purchases until they eventually end up in a position where they need to pay a large chunk of money – which they are unlikely to have all at one time – back.
When you shop with BNPL, the chances are that, for consumers, they’re not yet worried about how they’re going to pay for something – that’s a problem for the future. Buying items with BNPL only delays the inevitable and means you’re only going to worry about where that money is going to come from later down the line.
Missed Payments Can Damage Your Credit
Until recently, BNPL didn’t report on your borrowing habits or have implications for late payments. This, however, has now changed. In the UK, there are 3 main credit agencies and each of these agencies holds data about you, also known as a credit report or score. This is a record of your past “behaviours” when it comes to spending, borrowing and financial investments, such as contracts or mortgage applications, as well as any previous applications for credit. Future lenders will use these reports as a means of deciding whether or not they should let you borrow.
Now, however, BNPL providers will report on missed or late payments which will go on to form part of your credit history, having a negative impact. On-time payments, on the other hand, can have positive effects as they can show future lenders that you can be trusted with credit. With this changing landscape, if you do use BNPL, then it’s more important than ever to ensure that you are making payments on time.
You Miss Out On Consumer Protection
Section 75 is a law which means that, if you purchase items over £100 on a credit card, then the provider is required to protect that purchase. This means that if there is a problem with the item you bought, such as a fault or missing delivery, then you are eligible to get your money back. For a lot of consumers, especially when making large purchases, Section 75 provides reassurance in the case that something goes wrong.
However, Section 75 rules are not applicable when a third-party payment is used, as this breaks the link between consumer, retailer and credit card company. If you choose to use BNPL to purchase an item, or to spread the cost, then you will not be able to call upon Section 75 or your credit card provider if the item is at fault. Instead, you will only have access to the protection that the BNPL provider offers, or take the issue up directly with the retailer.
Younger Targeting
Shopping online is now potentially the easiest form of shopping and, as a result, it is much simpler for young teens to spend online. With many product launches and clothing lines specifically targeted towards young teens, BNPL companies are also able to put their products in front of this younger audience. It’s important to explain to teens the risks associated with BNPL and other loan instalment offerings.
Buy Now Pay Later is classed as a loan, so borrowers will need to be 18 years old at least in order to apply. Even if an applicant is 18 years old, there is a chance that they could be denied for BNPL, as often a strong credit score is needed. If your teen is under the age of 18, then it is highly likely that they won’t be able to apply. However, the issue is still there that this early introduction to the possibility of BNPL increases the chance of more and more young adults taking up this form of loan and debt in the future, which may cause ongoing reliance or overspending.
There is an alternative in that BNPL can help teach young adults and teenagers the importance of paying bills on time, or taking responsibility for financial decisions that they make which cannot be easily undone. If you have a teenager who is old enough to use and apply for Buy Now Pay Later, it’s important to talk to them about finances and how decisions can impact their future credit history and scores, which may then affect their chances of successfully making bigger purchases or investments, such as a house or car.
Struggling With Debt?
The pandemic and subsequent cost of living crisis have both led to more people struggling to manage their payments and debts, including Buy Now Pay Later debts. If you’re someone who is facing debt problems and don’t know where to start in getting help, remember it’s important to do so before it becomes too late. Speaking to a financial debt advisor is a good first step to take and they’ll be able to talk you through some different options and what you can do next.
