Don't Believe the Hype:
Buy Now, Pay Later
The world of retail has been a changing landscape since long before the COVID-19 pandemic began, with there being a continual shift from purchasing items on the high street to purchasing items online, which was undoubtedly accelerated by the pandemic. The onset of the pandemic back in early 2020 meant that many retailers internationally had to close their doors due to the restrictions imposed as a result of various national lockdowns.
This had a profound effect on the retail sector and meant that many consumers switched their spending habits to online purchasing. Now that many stores have reopened following COVID-19 restrictions easing, the shift back to in store purchasing has begun although a far higher proportion of spending remains online than was the case prior to the pandemic.
To put this into perspective, at the height of the pandemic restrictions in April 2020 retail sales fell by a quarter compared to pre-COVID levels. While total sales have now made up for this lost ground, in store sales are still down nearly 10% while online sales were still up by nearly half in August 2020 in comparison to the beginning of 2020.
The growth in the online retail sector which has been accelerated by the COVID-19 pandemic, also coincides with new figures from various studies which go to show that people are falling into debt at a younger age. New figures from the UK based debt advice provider, Financial Wellness Group, shows that 31% of new debt advice and solution customers are now under the age of 30, up 23% from 2019. These studies also show that there’s been a sharp rise in the number of people starting a debt solution that have Buy Now Pay Later (BNPL) and online shopping debts; up from 28% of customers in 2019 to 42% by the end of 2020.
There is increasing concern from debt advice service providers about the growing numbers of people that are getting into serious debt from a younger age, often while they’re still living at home. In a rising number of cases this is being driven, at least in part, by easy access to credit provided by some online retailers and BNPL lenders. This type of lending is particularly dangerous as it encourages consumers to focus on the instant gratification of what they’re buying, and less on the affordability of the repayments over the coming months.
The shift towards online purchasing that’s been triggered by the pandemic, the widespread availability of online shopping credit, and the fact that people have been encouraged to spend more time on the internet is particularly problematic for individuals with Compulsive Buying Disorder (CBD) which is believed to effect 8% - 16% of the UK population according to data made available by the Priory Group.
Perhaps two of the most popular BNPL providers are Klarna and Clearpay. Managed correctly, BNPL can offer a cheap and easy way of accessing credit but if not, you may face late fees and marks on your credit file. For example, BNPL can work well if you need something urgently, don’t have the money to hand but you’re confident you can make the repayments. Each of these services will send you regular reminders of when the next repayment is due but the trouble starts if you miss a repayment, or don’t have the money in your account for the payment to be taken.
When this happens, you’ll start being charged interest on the repayments (up to 18.9% APR) meaning that your purchase could turn out to be a lot pricier than you first thought. In the event of making a late payment, you may also be charged an additional fee. Whilst BNPL can be a cheap way to borrow, we would recommend answering these three questions if you are considering using BNPL to make online purchases:
1. Would I have bought this item in the first place if buy now, pay later wasn't an option?
2. Am I sure I can meet the repayments?
3. Is buy now, pay later the best form of borrowing out there for me?
If the answer to any of the above questions is a no, then we’d argue that you shouldn’t be using BNPL at this moment in time.