How do ‘Buy Now Pay Later’ schemes work?

Schemes which allow consumers to buy items and pay for them later on will now be regulated by the financial services regulator, the FCA, under new proposals announced earlier this month.

Here, we explain how this type of scheme works, and why it pays to be aware of the pitfalls of signing up to one.

How do ‘Buy Now Pay Later’ schemes work?

As the name suggests, this type of scheme allows consumers to buy goods – typically from a standard retailer – and pay for them in the future, usually without having to pay any interest. Payments are typically deferred for 30 days but this can vary by provider, or items can be paid for in regular instalments.

Although you often won’t be charged interest on what you owe for this initial period, if you miss any of the repayments, you’ll usually have to pay late payment charges and it could damage your credit score, making it harder for you to borrow in future.

More than five million people used Buy Now Pay Later plans, provided by companies such as Klarna, LayBuy and ClearPay, to purchase £2.7 billion worth of goods last year alone. With many people feeling the pinch due to the pandemic, it’s not surprising that the idea of not having to pay for your purchases there and then might be an appealing option.

Buy Now Pay Later schemes aren’t necessarily a bad thing, as long as they’re managed carefully and those signing up for them are certain they can afford to pay off what they owe before any interest gets charged. The major concern however, and the reason for their popularity amongst retailers is that they can incentivise people to make purchases that they might not have made otherwise. In some cases people may be unable to pay back what they owe, or simply spend more than they’d perhaps budgeted for.

What protection will the new regulations provide?

Following the FCA’s review recommending regulation of the Buy Now Pay Later lending sector, which was led by Chris Woolard, customers won’t be able to sign up to one of these schemes without undergoing affordability checks. The aim of these checks is to ensure that customers can repay what they owe without falling into debt.

The regulations will also ensure that customers who run into financial difficulties and are struggling to pay back the money they’ve borrowed are treated fairly, especially if they are vulnerable. Customers who feel they’ve been treated unfairly will also be able to take their case to the Financial Ombudsman if the company involved has been unable to resolve their problem. The Ombudsman service is able to look into financial issues on your behalf and will try to sort out the issue with the company involved. Find out more about how the Financial Ombudsman works here.

Caroline Siarkiewicz,chief executive of the Money and Pensions Service said: “The proposals to bring Buy Now Pay Later under regulatory scrutiny would provide further protection for people to avoid the potentially harmful consequences of this form of borrowing, which can result in people spiralling into debt. This has come at a crucial time as many people face increased financial pressures as a result of the Covid-19 pandemic.

“Access to affordable credit can be a lifeline for people in financial difficulty, but more work needs to be done to avoid repeat lending of high-cost credit products which may not be appropriate for people’s individual circumstances.”

As yet, no date has been announced for when Buy Now Pay Later schemes will be regulated, and the government will first need to consult on how regulations will be implemented.

If you’re struggling with debt…

If you’re in debt and aren’t able to pay back what you owe, it’s vital that you seek help as soon as possible. Contact your lenders and let them know you’re struggling to make your repayments – they might be able to arrange a more affordable repayment plan with you. You may also be able to reduce your other outgoings so that you can pay back your debts.

For more information you can read our guides on tried and tested ways to cut costs or ideas to help with budgeting if you’ve suffered a fall in income.

If you need further help, get in touch with one of the charities specialising in free debt advice. These include StepChange, National Debtline and the Debt Advice Foundation. You can find out more about your options if you’re in serious debt here.

The most important thing is that you seek help as soon as you can, to avoid problems building up and to help you take back control.

Have you used Buy Now Pay Later plans to buy goods? We’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

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