In this week's Fund Yourself Times, we covered the (un)affordability of Christmas and the scary stats behind Buy Now Pay Later schemes. According to the latest report from StepChange debt charity, who have just launched their #ChristmasDebt campaign, 33% of 16-34-year-olds are expected to Buy Now Pay Later this Christmas.
So if postponing payment is on the cards, here are the 7 things you should know...
1. Pay up or you’ll pay a lot for it later
Many providers offer the loan interest-free (0% APR) for a fixed time (usually between 14 days and 6 weeks) but after this, expect to face rates of around 20-30% APR. Depending on the provider, there might also be late payment fees.
2. It’s debt
Sexy marketing campaign maybe, but it’s still a loan and it’s win-win for the retailer. They get more customers, and customers spend up to 30% more. Store finance is regulated by the Consumer Credit Act and most agreements are a type of unsecured personal loan. You’re the legal owner of the goods straight away, and whilst the retailer can’t take the goods back if you miss payments, the lender will be in touch about this and could decide to start threatening further action.
3. They’re not all the same
Different providers offer different products and all of them will vary in how much they’ll cost you and the consequences of not paying on time.
For example, Klarna offers...
‘Pay later’ you get either two to four weeks to pay, starting from when you receive the item/s. If you pay in time, you don’t get charged any interest or fees.
‘Slice it’ where you pay for your purchase in monthly instalments. Depending on the provider, it could involve paying interest.
4. Beware! Your credit score is at risk
How it’s affected depends on what you apply for.
Taking Klarna as an example:
Pay later - when you apply, the lender usually runs a soft search against your credit report which won't affect your score and will only be visible to you. But missing or making a late payment could damage your credit score.
Slice it - where you pay for your purchase in monthly instalments. They will run a hard search against your report which is visible to lenders. Several in a few months make your record look worse – even if Klarna approved you. Even rejections could affect your score.
5. Not everyone can use them
The reason providers run credit checks is to see how likely you are to pay them back. Credit companies will only let you pay later if they think you’re a reliable borrower which means some people might be unable to use the service.
6. It’s not all about the interest rate
Missing a payment (including Klarna’s 'Slice It') means you could be charged a late payment fee in addition to a hefty interest rate. If you continually miss payments, the lender will get very tough. The first step is a default notice and next steps could include passing the debt to a collection agency or taking court action. This seriously damages your credit score and has all sorts of knock-on consequences.
7. You can get help
If you're struggling to make repayments, don’t stress.
Step 1, contact all of your creditors to arrange a more affordable repayment.
Step 2, you can also contact StepChange Debt Charity for free, confidential debt advice, available 24/7.