The hidden dangers of ‘buy now pay later’ deals

The use of ‘buy now pay later’ deals, offered by companies such as Klarna, Clearpay, and LayBuy, has grown enormously over the past year, particularly with younger shoppers. However, despite the glamourous lifestyle it promotes, it has become an easy way to fall into debt, so much so that tighter controls are now being introduced. Ruby Khatri, debt adviser at the Law Centre, explains the dangers and sets out some better options than buying on credit.

What are the dangers of a ‘buy now, pay later’ attitude?

If you’re buying something and you’re given the option of spreading the payment out into instalments or even deferring it for up to 30 days, it can seem very attractive. The problem is that it becomes very easy to spend more than you can afford and so you fall into debt unknowingly. Klarna, Clearpay and companies like them currently only perform soft searches with credit reference agencies, so they’re not able to accurately understand your individual situation and whether you’re really the right candidate to use their services in the first place. If it turns out you can’t afford your latest instalment, you’ll be referred to a debt collection agency and this will affect your credit score. 

How is my credit score affected?

If you fail to make your repayments, this will be reported to the credit reference agencies which impacts your credit file and score. It will stay on the record for six years and will affect your ability to get anything on credit, from a mortgage to credit cards. It’s really important to be aware of the implications before taking out one of these ‘buy now, pay later’ arrangements.

Do you think Klarna and companies like it are encouraging debt as a lifestyle choice, rather than a last resort?

Yes; whilst Klarna seems to glamourise debt as a lifestyle choice, living on credit is not something that should be encouraged. I have a client who spends more than their means – simply because companies like Klarna are so available – and then has no plan of how to repay the money they’ve spent. In these situations, it’s so important not to choose debt, no matter how appealing paying in instalments may first appear.

When money is tight, ‘buy now, pay later’ options can be really attractive. What’s a better option?

The best approach is to have a budgeting plan so you’re not spending money without knowing if you can pay it back. If you’re struggling to budget and save, we recommend signing up for the free Open University Academy of Money course provided by www.moneysavingexpert.com. It will provide you with the skills to budget and manage your money to make sure you get the best deals. There is also a higher level Managing my Money course you can take which focuses on all aspects of personal finance.

It’s so important to know your income and your essential outgoings. If you’re falling behind on essential payments, you can contact our team for free advice. Whatever your situation, buying on credit should never be your preferred option.

So is it best to avoid companies like Klarna at all costs? 

It is possible for Klarna to be used positively, but this should only be in emergency instances and when you’re fully aware of the implications and have a plan of how to repay the instalments. For example, I had a client who used Klarna to buy the essentials for a room he’d been provided with by the mental health services, and he paid for his purchases in instalments. But this was an emergency need where the client did not even have a bed to sleep on. In this instance, he was able to buy a mattress and a bed and a kettle. The essentials.

It’s been announced that companies like Klarna will be subject to greater controls. Will this help?

As a result of the huge rise in the use of these companies, the Financial Conduct Authority (FCA) has announced that it will step in and regulate the sector. This is clearly to be welcomed. Companies like Klarna should be subject to more affordability checks and should follow the same rules as other credit services. When people borrow money, no matter where from, they should undergo the same checks as when borrowing from a bank. This way, people who are already in trouble will not get even deeper into debt.

If you are struggling with problem debt, please contact us today at www.swllc.org/debt and find out how we can help you.