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Buy Now Pay Later – Is It ‘Free Credit’?

Many of you may be familiar with the new payment methods now regularly offered during online purchases called  Buy Now Pay Later (BNPL) or Pay In Three. Credit companies such as Klarna, Paypal and Clearpay are payment solutions that allow you to purchase items now and pay for them later. You have 30 days from the day the items were dispatched to make this payment, or you can pay in three equal payments over three months. These buy now pay later payment methods are now available on many online stores such as ASOS, Zara, Gymshark, JD and Schuh, to name a few.

This sounds ideal, right? Whether you’re unsure of which size you need, or you can’t decide between two different outfits, you now have the option to order them all, try them and compare without seeing a dent in your bank balance. Try before you buy, a dream combination!

The Growth of Klarna and the BNPL Phenomenon

In recent years Klarna has had massive growth as a company and is now available at hundreds of stores and is continuing to sweep across online retailers. Klarna states that “since launch, over 7 million customers have now used Klarna in the UK, an increase of 2x compared to last year.”

This is not just music to the ears for the creator of Klarna but also for those retailers who engage with it as “BNPL accounted for 3.6% of all online retail sales in the UK in 2020, with over 10 million users in 2020”.

The majority of Klarna users appear to be those who are in their late teens and early twenties. This may be down to the impulsive nature of this age group of people or because they do not view this type of instant financing as ‘real debt’, which is cause for concern. (This only highlights all the more reason we should be teaching our children about money and debt from a young age!). Debt experts treat this as any other credit system. However, clever marketing has allowed Klarna to get its foot through the door with a susceptible, unsuspecting market.

Online shopping has reached epic proportions, particularly over the last 12 months during the covid-19 pandemic. So many people are willing to spend an increased amount of money, money that they technically don’t have to spend at the time, due to the convenience of instant financing. It is easy to see how this type of credit can quickly become problematic and why more and more people are finding themselves in debt in today’s society.

Is Buy Now Pay Later a Help or a Hindrance?

It is easy to see why Klarna is so appealing. Imagine this, you need a new outfit for the weekend, but it’s the weekend before payday and your bank balance says no. Klarna can solve this problem! You can buy the dress regardless and just clear the bill as soon as payday comes around.

Or, you’ve got a wedding coming up and you just can’t decide what to wear. Klarna can solve this problem! You can now order a few different outfits to try on the day and decide which you prefer before sending the rest back. Surely there’s a catch?

Klarna allows you to spend money in anticipation of your next paycheck. It is possible that by the time it comes around you realise you can’t afford all of it this month either. Instant credit promotes bad money management and frivolous expenditure. However, the real catch is in the small print.

Is Buy Now Pay Later Bad for Your Credit Score?

Most BNPL regulations like Klarna’s state that you have between 14 and 30 days to pay for any items you wish to keep and to return any unwanted items, which seems fair. However, we are human, and amidst our busy schedules, things like this can slip our minds. If you fail to return an item, regardless of whether it fits or whether you’ll ever wear it, you are required to pay for it.

If you fail to make your payment date, Klarna will attempt to remove this from your account and if they fail to do so, they will help settle your bill for a total of 120 days but after that, your debt is referred to a debt collection agency. The soft credit check that is run to ensure you are eligible to use the buy now pay later credit at the beginning is now a hard credit check and is added to your credit report!

Is Buy Now Pay Later a Bad Idea?

Buy Now Pay Later companies such as Klarna have certainly upped the checkout game on many online stores. Provided that it is used correctly by people capable of managing their finances and who can resist the temptation of a whole new wardrobe, it is undoubtedly a great tool to have access to many benefits for the user. However, if you’re living on a low-income or reduced budget and have no guarantee that you won’t be just as short on funds the following month, maybe saving the money in advance is a better way to revamp your wardrobe. 

If you’ve fallen foul of the so-called ‘credit trap’ and are struggling to meet repayments, contact Debt Movement today and chat to one of our friendly, expert guides about how you can regain control of your finances.