Smart Money: Be wary, buy now, pay later comes with risks

However, I’m not here to be popular (well, maybe a little bit), so buyer beware! The new rules don’t kick in until next year, so for now, watch out when you borrow, or you could end up with a huge debt you can’t deal with. Here's my guide to how BNPL works.

What is buy now, pay later?

BNPL works by giving you a short-term loan, with or without interest, so you can buy goods or services even if you can’t afford to pay the full price up front. Retailers have been actively pushing BNPL credit and you’ll be hard pressed to find one that doesn’t offer BNPL when you shop online. There are three main types of BNPL credit.

Try before you buy

You have a short period – usually 30 days but sometimes as low as 14 days – to “inspect” goods before committing to buy them. These deals let you try things on, check goods out and see if they work for you before committing to buy. However, if you don’t return the goods on time, you could find you’ve bought them. Bear in mind the 14 days just mirrors your existing online shopping rights under the Consumer Rights Act.

Limited instalments

The most well-known form of BNPL deal lets you pay in a limited number of instalments interest-free – usually three. This means you can buy things up front that you may not have the money for in full at point of purchase. However, you have committed to buy.

Credit agreements

These deals are closer to the older credit deals in that you pay in instalments over a longer period and pay interest. It’s usually less than credit card interest but is still higher than a standard bank loan.

What happens if you can’t pay?

While BNPL firms may not charge debt interest, many readers have reported that businesses are quick to pass on debts to debt collectors who have a whole range of penalties and pressure tactics they can apply – and they can register financial debts with credit reference agencies. Worryingly, this can happen for relatively small sums.

What do the new rules say?

According to the Treasury, from next year, businesses offering BNPL will have to:

• Carry out upfront checks to make sure people can repay what they borrow.
• Offer “fairer and faster access to refunds”.
• You’ll also have the right to complain to the Financial Ombudsman, as with other regulated forms of credit.

At present, BNPL firms are rather opaque about the checks they undertake to see if you can afford to borrow money. With most forms of lending the business will undertake a “soft” or “hard” credit check to see if you can afford to borrow. Soft checks don’t go on to your credit file, hard ones do.

If the lender doesn’t check your credit file, it won’t know how much you’ve borrowed – you might be hopelessly in debt and they won’t know. You might also have multiple BNPL loans – at the height of the payday lending frenzy, the average number of loans per borrower was seven. People were drowning in debt and just getting in deeper.

We’re still waiting for more details about how the new rules will work. I’d like to see tighter rules on passing people on to debt collectors and helping those in debt. Watch this space.

Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist. For more articles, visit this link.