What are the Risks of Buy Now Pay Later?
Buy Now, Pay Later is a form of short-term financing which enables consumers to put down only partial payments at the point of sale. They are then allowed to pay off the remaining balance across fixed monthly installments which are typically interest-free. The interest-free aspect of buy now, pay later makes it a popular choice for consumers as a default payment method.
While the buy now, pay later payment is extremely popular, it is not without its risks. This article will outline five things that prospective borrowers should be wary of before they pursue this form of short-term financing.
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It Can Leave Consumers With Unaffordable Debt
Buy now, pay later schemes can make it easier for prospective consumers to end up spending more money than they can really afford. This is because the upfront purchase cost can seem cheaper when it is split up into small repayments. Since these repayments seem so small, consumers may be tempted to purchase more and more on different days or using alternative buy now, pay later accounts.
As such, they could quickly get caught spending far more than they originally intended, or even more than they can actually afford to pay overall.
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It Can Make It Difficult For Consumers To Track Their Spending
It will come as no surprise that because each buy now, pay later purchase may seem so small, they will add up and have the tendency to sneak up on consumers. In other words, it may get addictive with consumers not fully realising the consequences of each payment made.
For instance, wanting to pay £15 every few weeks to afford a nice dress for an event may seem easy. It may seem so easy that it would seem to make sense to buy some more items over those next few weeks. Before the consumer knows it, they may end up spending nearly £100, or the equivalent of their fortnightly food shop, on buy now, pay later payments alone.
Not being able to track their spending means that these payments could add up to an amount that the consumer may not be able to afford, leaving them in financial difficulty or even debt.
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It Can Affect a Consumer’s Credit Rating
Starting last month, popular buy now, pay later lender in the UK, Klarna, began to report data with credit bureaus Experian and TransUnion. This data will include information on where a consumer has paid off their borrowed installment on time or they are falling behind on their payments, thus meaning that this will start to appear on and consequently affect credit reports in around 12-18 months time.
As such, having multiple buy now, pay later applications, accounts, or missed payments will impact future credit applications, such as mortgages or car loans.
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The Fees Can Add Up Quickly
If a consumer fails to meet their payment date, they will likely incur late payment fees and collection fees, neither of which are subject to any cap. Further, a missed payment could also mean that the consumer incurs other costs such as a dishonour fee from their bank. This would typically apply in situations where they do not have enough money in their bank account to make the payment.
Additionally, there are dangers of using a credit card to make the repayments, especially in instances of late payments again. If a consumer fails to also repay their credit card bill, then they will end up paying interest on top of this too.
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Credit Laws Do Not Apply To Buy Now, Pay Later
At present, buy now, pay later lenders are not covered under the National Consumer Credit Protection Act. This means that lenders do not have the same obligations as banks or other credit unions to check in the first instance that a prospective borrower is able to afford the repayments.
As such, in similar instances to payday loan lenders, this may attract consumers with poor credit scores who are unlikely to be able to afford the repayments, leading them towards further spiraling debt.
