Should Buy Now, Pay Later Schemes Be Normalised?

Unless you've been living under an online-shopping-free-rock these past few months (if so, kudos to you), you've probably heard about Klarna and other 'buy now, pay later’ (BNPL) financing schemes. The premise is as it sounds: ‘buy now, pay later’ allows customers to defer paying for their shopping – anywhere from two weeks to a year.

Unsurprisingly, at this wildly unpredictable time of economic uncertainty and redundancies, such schemes have surged in popularity. Klarna’s commercial vice president, Luke Griffiths, told Sifted that they had seen revenues grow significantly since March, with a 20% in UK retailers using its service during April.

The appeal of instant gratification + delayed financial responsibility is indisputable, and it is backed by some worrying statistics. Buy now, pay later services for online shoppers are growing at an average of 39% a year (Worldpay 2020 Global Payments Report). Research by Freeze Debt found that more than half (54%) of Brits use buy now, pay later services such as Klarna and Clearpay, and that 60% of people don’t regard money owed to buy now, pay later services as “real” debt. A fifth (20%) of young people believed debt to companies such as Klarna and Clearpay was “different to credit card debt”.

As with every financial product, it's important to be critical but also to be objective on what it can and can't offer - the pros and cons. This is why we've decided to round-up on the good, the bad, and the ugly when it comes to buy now, pay later schemes.

the good

If you use buy now, pay later schemes correctly, the shops you've bought your items from won’t charge you any extra. This means that you can replace your broken dishwasher pronto, and pay for it when your pay check allows you to (or in instalments). BNPL essentially gives shoppers the option to defer payments for items that they may urgently need, while allowing the flexibility of paying in instalments. Plus, during intense spending periods, like Christmas, buy now, pay later helps to soften the blow on your bank account.

If you find yourself in such a situation, it's important to stay clued in on when your interest-free period ends. Normally, you'll be made aware directly by the company of when this period will end and how much interest you will have to pay should you choose not to repay the full amount before the deadline.

Be aware that different BNPL schemes operate differently —  Klarna, for example, will send requests for repayment via text, email, in-app notifications and letters, which means you're unlikely to simply forget to repay what you owe. They also say that at no point will the you face any additional charges or interest on their outstanding fees, nor will your credit score be impacted.

BNPL companies also make the point that they create a more intuitive approach to shopping, which allows retailers to sell more. And, in these times of intense recession, that surely can't be a bad thing for the economy. Klarna, for example, says that shoppers spend 55% more when they can pay by instalment, and 44% of users would back out of a purchase if these options weren't available.

the bad

The amount of interest charged (past the 30 days option/paying in three instalments), varies between different shops and BNPL schemes. You really have to triple-check those T's&C's before you agree to a financing option.

It's also important to note that we tend to spend more per purchase with these schemes. The immediacy of our financial situation isn't felt quite as acutely when you have the option to get what you need (or want) now, but pay for it later. We tend to think that our financial situations might change soon, or that, for one reason or another, we'll be better placed to make purchases next month than we do now. But if your financial situation is less than ideal today, it's highly likely that you'll be unable to keep up with the payments tomorrow, which is when the pay later scheme can start causing big trouble for you and your future.

the ugly

Say, for example, you buy something for £250 using a buy now pay later scheme, agreeing to pay the amount back in full in thirty days or split the cost over three months in equal instalments at a 0% interest rate. Sounds great, right? However, if you miss a month, pay too little or pay late, your fees are likely to jump to as high as, well, possibly 19% (APR). Buy now, pay later schemes may serve to encourage consumers to over-stretch themselves while fuelling the debt boom in the UK.

Klarna operates differently from some of the other financing schemes. If, after a period of several months, the customer still fails to pay they will no longer be able to use any of Klarna’s services and Klarna engages a debt collection agency to continue to attempt to contact the customer. However, when using Klarna, at no point will the customer face any additional charges or interest on their outstanding fees, nor will their credit score be impacted.

It's also important to consider the mental health impacts of such schemes, and debt in general. According to research provided by Money and Mental Health Policy Institute, people experiencing mental health problems are significantly more likely to end up behind on payments for these credit products, or using this credit to buy things they can’t afford. People with mental health problems are twice as likely to have fallen behind on payments for products bought with these schemes (16% compared to 7% for people without mental health problems). 

To pay now or not to pay now?

Here at Vestpod, we're sympathetic and supportive toward women from all walks of lives, incomes, living set-ups and lifestyle desires. Our mission is simple (albeit ambitious!): to educate and empower women when it comes to all things money. We hope that given the information provided above, and perhaps a little more personal research, you'll make your own informed decision on whether or not buy now, pay later schemes are for you. Our biggest problem with buy now, pay later programmes revolve around debt and financial literacy. Yes, some customers have a basic understanding of how these plans work, but many remain unfamiliar with the consequences of late payments.

Find more info from debt charity StepChange here.

But if you really want our personal opinion? It's one thing to need to urgently replace a broken washing machine with the help of three BNPL instalments, it's another to go into debt over a pair of Jimmy Choo's. Stay informed and always ask yourself twice whether you really need something before risking going into debt for a purchase.