In the last few years, a very old form of credit – ‘buy now, pay later’– has had a dramatic makeover. So dramatic, that its almost unrecogniseble from the old catalogue or shop credit that you might have used to buy a sofa on an interest-free deal in the past.

Around 15 million people used buy now, pay later credit last year – just under 30% of the adult population.

On paper, what’s not to love? Most of the loans are interest-free and there’s no catch if you pay up within the agreed timescales. It’s not like payday loans where people found themselves tapped in to massive, spiralling debts.

Yet buy now, pay later lending has proved immensely controversial since Klarna launched in the UK. This is partly because the bulk of the lending is unregulated, which means you can’t go to the Financial Ombudsman if something goes wrong. But the main objection is by working in partnership with all the big retailers, it’s possible to ‘sleepwalk in to debt’ just by clicking on the credit option at the till. In short, it’s easy to spend money you don’t have and get stuck with a massive bill.

Here’s my guide.

Buy now, pay later – the lowdown

Buy now, pay later credit (BNPL) is one of the oldest forms of credit available to people in the UK, going back several decades to before the current regulatory system began back in 1988.

However, with the rise of online retailers and a dramatic shift in the way we shop, this form of credit has been ‘reimagined’ and repackaged. In essence, BNPL allows you to purchase goods or services and pay at a later stage, either in instalments with or without interest.

The old and the new deals

There are two main types of BNPL deal:

Old BNPL credit is the more traditional longer-term deal offered by retailers through their own credit schemes. This allows you to pay for goods over a fixed period of time, usually two or three years, though longer for ‘big ticket’ items. These deals may come with an interest-free period where no interest applies if (and it’s a big if) you pay the full amount during this period. Otherwise interest applies. These deals are usually regulated.

New BNPL credit is usually provided by a third-party credit firm at the online ‘till’. It allows you to pay in a variety of different ways for goods and services. However, some deals are regulated, and some were not (thought this is changing). The big firms in this sector are Klarna, Clearpay  and Laybuy. Increasingly banks and retailers are launching their own BNPL deals.

How new BNPL credit works

With money tight for people across the nation, there’s been an explosion in new buy now, pay later credit deals in the last three years. So much so that it’s unusual to not have the option to pay this way when buying from a major brand online.

The options vary but generally fall into the following categories:

Try before you buy: This is where you have a short period of time – usually 30 days but sometimes as low as 14 days – to try goods before committing to buy them. Of course, you can’t pop on a frock, go out and send it back, no matter what you might read on Instagram. These deals allow you to try things on, check goods out and see if they work for you before committing to buy. However, if you don’t return the goods on time you could find you’ve bought them.

Limited instalments: The most well-known form of BNPL deal works by letting you pay in a limited number of instalments interest-free. This means you can buy things up front that you may not have the money for in full at point of purchase. However, you have committed to buy.

Credit agreements: These deals are closer to the older BNPL deals in that you pay in instalments over a longer period and pay interest. This isn’t as high as some retailers charged in the past – it’s usually less than credit card interest, for example – but is still higher than a standard bank loan.

Sounds good – so what’s the problem?

New BNPL companies like to say that you won’t pay interest and they won’t log debts with credit reference agencies. So what’s the catch?

The problems occur when you can’t pay. The world is a volatile place at the moment, and you may suddenly find yourself out of a job with bills to cover. While BNPL firms may not charge debt interest, many people have said that businesses are quick to pass on debts to debt collectors who have a whole range of penalties and pressure tactics. Worryingly, this can happen for relatively small sums, sometimes under £100.

Credit reference agencies can be notified about financial debts pursued by debt collectors. Many BNPL are now saying that they will include details of existing arrangements on your credit file now – ostensibly to show to lenders that you are paying off your credit deal. However, this might be counter productive for some lenders if you have too many deals (or even one).

The 14 and 28/30 deals are frustrating because they gloss over your consumer rights. If you buy online you have a 14-day window to change your mind anyway for most purchases (not all though).  You also have 30 days to return goods that aren’t as advertised or may have been misrepresented. This form of credit effectively monetises the act of buying something and returning it if you don’t return the goods in time. This seems rather unfair, given that we need to try some goods like clothes to see if they fit. It’s not uncommon for people who order three of the same items of clothing to try on to find they’ve bought them because they didn’t get the goods back on time.

But the issue that’s proved most contentious is the way some retailers have sold these deals as lifestyle products rather that a financial commitment that has penalties. Many people have objected to retailer websites encouraging people to spend money they don’t have with little warning about consequences. Others have highlighted how easy it is to get into debt with multiple retailers or lose track of what you’ve spend if you’ve got a number of deals running.

The regulator is currently looking in to regulating all forms of BNPL credit. But currently, the most popular forms aren’t regulated. This matters because it means you can only go to the free Financial Ombudsman for help if the credit deal is regulated.

What about the older BNPL deals?

The longer term, higher interest, old BNPL deals are very much still around and make up roughly half of all complaints. You can spot them because they are longer term (usually over a few years) and often use interest-free periods as an incentive.

These deals work on a rather clever bit of psychology. We all think that we can beat the system by paying off the goods during the interest free period. But lots can go wrong in life on the way and many, many people end up paying the higher interest. This often appears with little to no warning.

Shops and credit providers know our intentions are good, but we often fail to pay in time and therefore make a hefty profit off these deals. In fact, the catch with these deals was the interest was shockingly high (often 40%) and if you didn’t pay off the loan during the interest free period then you had to pay interest on the whole original sum!

The brand-new rules

The FCA commissioned the Woolard Review to look at the new forms of ‘unregulated’ buy now, pay later credit provided by Klarna, Clearpay and Laybuy amongst others.

The results of the review have been announced but the key factor is this credit is going to be regulated too. You can read the recommendations here:

This will happen as soon as possible and should involve access to the free Financial Ombudsman Service (FOS) as well. The regulation will be fast-tracked, but it isn’t in overnight – though we would expect all the businesses involved to implement the new rules as soon as possible.

What if I can’t afford to pay?

Whatever the deal, if you’re struggling to pay money you owe, contact the firm you’ve borrowed money off as soon as possible and ask them what your options are. Don’t borrow to get out of debt. If you feel the firm isn’t helping, go to the Financial Ombudsman if it’s a regulated agreement. If not, report the firm to the FCA and contact a free service like StepChange if you’re really struggling with your finances.

Featured in Mirror – Martyn James

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