Tempted at the till by deals that mean you can go home with your new sofa, TV or leopard skin coat on credit? It’s great if you know you’ll pay the loan back on time, but watch out for the sting in the tail…
Many online retailers offer ‘buy now, pay later’ (BNPL) deals, where not only is interest not charged on a debt for a set period of time, but there is no obligation to make any payments either.
These deals can be great for savvy shoppers with a tight grip on their finances – but they can turn out to be an expensive mistake if you fail to read the small print.
BNPL is typically offered by online catalogue stores such as Very (Very.co.uk), Grattan (Grattan.co.uk), Jacamo (Jacamo.co.uk), Littlewoods (Littlewoods.com) and Freemans (Freemans.com). This type of credit gives buyers of anything from a new sofa or TV to clothes and gadgets the option to buy an item immediately and pay for it later, often with no interest charged before a set date.
Shoppers need to open a credit or personal account to benefit from BNPL or other payment options, which let them spread the cost of a purchase. As with old-style store cards, there is usually an incentive to open an account and set up a credit agreement.
For example, Very offers selected customers a £30 discount if they open a Very account and spend at least £60. Grattan, Freemans, Look Again and JD Williams (which owns Jacamo and Simply Be) all offer customers 25% off their first order when they open an account, while Littlewoods offers a discount of 10%.
But while these offers might sound a great way to save money and delay paying for an item, it’s vital to know what you’re getting into.
“Opening a store card or account to get a sign-up discount can be a great way to save money especially on big ticket or large orders,” says MoneySupermarket’s money expert Sally Francis-Miles.
“However, always double-check the terms before signing up to anything and make sure that you pay it off before you’re charged interest.
“Debt can spiral quickly with store cards and catalogue accounts, especially as it’s tempting to worry about it later. It is a financial product and, as with all financial products, it needs to be carefully thought out before you commit.”
Calculating monthly repayments
Savvy shoppers can play BNPL deals to their advantage – but they need to be disciplined. One option is to calculate and make monthly repayments that ensure the debt is repaid before the end of the BNPL period. Be realistic about how much you can afford to pay each month and make a budget if necessary.
Consumers who have the cash to pay for an item up front could choose BNPL and stash their money in a savings account or high-interest current account, then withdraw the cash and pay off the debt before the deferred payment period comes to an end. This way, they can have the benefit of owning the item straight away, while also earning interest on their money.
Other people might expect their finances to improve in, say, six or 12 months’ time, and think they will be able to pay off the balance before interest charges kick in. Behavioural economists call this ‘present bias’: It’s human nature to see immediate benefits as more important than the distant pain of paying for the item.
Store cards can charge double average credit card rates
Missing the repayment deadline
But be warned, the hidden costs of BNPL deals become apparent if you fail to pay off the entire debt before the end of the deferred payment period. When interest starts being charged, the rates can be double the average credit card rate.
Littlewoods charges a typical APR of 44.9%, while Very is not much less at 39.9%. Look Again, Freemans and Grattan all charge 34.9%; Argos 29.9%; and JD Williams 24.9%. In comparison, credit cards from some mainstream banks can be found with an APR of around 18.9%.
Watch out for backdated interest
In many cases, failure to repay a debt in full by the end of the BNPL period could lead to interest being backdated to the date of purchase – not just the date the 0% period finished. Also, interest will be levied on the initial amount borrowed rather than just the outstanding amount. If you have been making some payments but not managed to repay the entire debt, this might seem unfair. In theory, you could pay the last £1 of the debt just one day late and be whacked with a massive interest bill.
An example on Grattan’s website shows the cost implications of not repaying a BNPL deal in time. It explains that if a customer borrowed £200 on a 12-month BNPL deal with an interest rate of 34.94% and failed to pay off the entire amount within the year, they would be charged interest of £69.88. This amount would then attract interest of 34.94% until repaid.
Adrian Lowcock, head of personal investing at Willis Owen, says there are plenty of reasons for people to be wary of this kind of debt.
“The reason such services exist is that companies know there are people who aren’t good at paying off any debts due before the interest rate charges apply, and therefore they recoup their costs and make more money from exactly the sort of people who should avoid these offers,” he explains. “The interest rates aren’t always clear up front and, instead, they are promoted with 0% offers and convenience messages.”
Grattan is in the minority when it comes to providing a worked example of BNPL before the customer commits to a purchase. Some other retailers only provide vague statements, but no figures.
Fashion website Very offers payment options where customers spending a minimum of £100 can delay payment for up to six months, and those spending £300 for up to a year. There is no interest to pay if you repay the debt in full within the payment-free period but when interest kicks in, the typical APR is 39.9%.
Very’s website states that “interest is calculated from point of order and charged at the end of the payment-free period, if you haven’t paid in full by this time”.
Customers are told exactly how much interest they will potentially have to pay when their order progresses through to the checkout stage. A £300 debt not repaid in full at the end of a 12-month BNPL deal would attract £119.70 in interest.
Littlewoods has a higher representative APR at 44.9%, meaning a customer who didn’t pay a £300 debt within a 12-month deferred payment period would be hit with an interest bill of £134.70.
A spokesperson for Shop Direct, the company behind Very and Littlewoods, says: “Helping customers understand our ways to spread the cost is vital in ensuring we maintain trusted, long-lasting relationships with our customers. In our most recent customer research, 96% said they are familiar with and understand how BNPL works. We continue to improve and look at new ways to make it even easier for customers to understand our ways to spread the cost.”
Andrew Hagger, financial analyst and founder of *Moneycomms, says the problem is many shoppers won’t pay too much attention to the small print regarding the interest-free repayment criteria.
“With such high rates of interest being charged, customers will be in for a nasty shock if they fail to pay up within the required timescale,” he warns.
Citizens Advice is calling for BNPL deals to be properly advertised with the consequences of not making a repayment on time clearly stated.
The charity cites the example of a man who bought a £600 iPad from a catalogue company on a year-long interest-free deal. He still owed £100 at the end of the interest-free period, and was hit with a backdated charge of nearly £700 interest – more than the original cost of the iPad.
Another potential issue with BNPL deals is that many shoppers will start out with good intentions to repay their debt before the BNPL period expires, but find their financial circumstances change and they can’t afford to pay.
“It is always worth saving money until you can afford to buy”
Caroline Siarkiewicz, head of UK debt advice at the Money Advice Service, says that before entering into any credit agreement it’s important to think about whether you can afford it, not just now but in the future.
“Be honest. If an unexpected bill arrives this month, can you still afford to pay your BNPL deal in full before the end of the interest-free period?” she says. “For retail spending, such as clothes, cosmetics or luxury items, it’s always worth saving money and waiting until you can afford to buy.”
For many people buying big ticket items or a series of smaller ones, a credit card will be a better option than retailer credit. A card offering 0% on purchases for a set period of time will be your best bet. But you need to make at least the minimum repayment each month – this amount will be included on your statement.
An even better plan would be to limit you spending until you have saved enough money to buy items with cash. That way, you won’t be caught out by the small print of BNPL deals and other ‘spread the cost’ payment options.
Emma Lunn is a personal finance journalist who writes for the Guardian, Telegraph, Mirror and Thisismoney.co.uk