Real Talk 27th November 2019 by Valerie Loftus

What You Should Know Before Using ‘Buy Now, Pay Later’ Services

It's tempting to 'try before you buy', but also risky.

Ahead of Black Friday, you’ll see many retailers suggesting that you use ‘pay later’ services to ‘try before you buy’.

Companies like Klarna allow shoppers to buy stuff online and pay up to 30 days later, or through equal monthly instalments.

Over 190,000 retailers now offer customers the option to ‘pay later’ via Klarna, which can be done very easily at checkout without having to set up a new account.

While ‘buy now, pay later’ is not a new concept, we’re more likely to associate it with making big purchases (such as cars and household appliances) rather than buying a new top for Friday night.

It’s very attractive to young people looking to afford new clothes or makeup, but it’s becoming clear that users are not fully aware of the risks involved in borrowing even seemingly small amounts.

A 21-year-old student recently told the BBC that her credit score had been almost ‘halved’ after missing a few Klarna payments, something she wasn’t aware could happen.

“All [Klarna] say is that you’ve missed a payment, and you have one extra week,” she said. “I was quite naive, and I didn’t think these little purchases would affect me so much, usually between £20 and £80. If I had known, I would have just used my credit card.”

So what happens when you opt to pay later? Klarna does a ‘soft credit check’ on customers to ascertain their ability to pay, but they say that this is not visible to other lenders and doesn’t affect your credit rating.

There are no interest fees or surcharges for late payments, however if a debt is left unpaid for several months, it’s passed to a debt collection agency – and this is marked down on your credit rating for other lenders to see in the future.

Klarna has been criticised in the UK for not properly explaining these risks to customers in its advertising, with debt charities describing some of the ads as ‘misleading’.

The company also employs online personalities and reality TV stars to promote the service, leading to worries that young people are being ‘influenced’ to take on debt.

Instagram/curtispritchard12

Dermott Jewell of the Consumers’ Association of Ireland says that “too often”, companies do not properly explain payment terms and potential risks to customers.

“The simplicity behind such arrangements put the consumer in a false sense of ownership without responsibility which, in terms of finance, is always a risk,” he tells STELLAR, comparing ‘buy now, pay later’ services to taking out a credit card.

“We have always advised consumers, for example, that if they are not in a position to clear the balance on their credit card when the bill comes in, then unless they are very skilled at managing their budget and finances, they should not have a credit card.”

“Longer term ‘pay later’ schemes come with differing risks as the assumption is always that your lifestyle will remain unchanged and without challenges that can affect your ability to pay. Life, sadly, is not that simple for most of us and unseen problems arise.”

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‘Buy now, pay later’ services can be fine if used correctly, and Dermott advises asking “all of the hard questions” so you know exactly what you’re signing up for.

“It’s similar to the approach we always recommend when taking out insurances – ask specifically for detail of what is not covered in the policy. It is the same with borrowing of any kind, ask what are the penalties and risk to credit worthiness in the event that you cannot pay when the time comes.”

Ask yourself: Would you still be making the purchase if you didn’t have the option to pay later? If you can’t afford it now, what’s the likelihood that you’ll be able to pay up in 30 days’ time? Be careful, be informed, and shop mindfully this Black Friday.

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