BUYERS are urged not to take on too much debt as Zopa has become the latest company to enter the Buy Now, Pay Later market today.
The bank has introduced its own BNPL service – a system that allows you to spread the cost of a purchase over several monthly installments.
But monetary experts have issued stark warnings about the risks of this type of debt.
The payment method means that you can place an item directly in your online shopping cart and the money will not come out of your account all at once.
BNPL instead allows buyers to pay themselves freebies that would normally take months to save up and pay in instalments.
Usually you must settle the balance within 30 days or interest will be charged.
And industry experts fear that buyers will quickly get into debt because of these schemes.
The problem arises if you miss a payment or do not return the money within the agreed time. At this point, interest begins to accrue on your purchase, making it more difficult to pay off the debt.
An estimated eight million adults owe money on BNPL purchases, according to the most recent figures from benchmark agency Credit Karma.
An average of £538 per person is held on BNPL, with total debt amounting to £4 billion.
And nearly two in five BNPL buyers have borrowed money to pay off debt, according to Citizens Advice.
A quarter relied on credit cards, while others asked friends and family, relied on loans or dipped into their overdraft.
Young people are most likely to be in debt, with more than half of 18-34 year olds having borrowed money to pay off BNPL debts.
This compares to 39% of 35-54 year olds and 24% of over 55 year olds.
The most popular BNPL providers – Klarna, Clearpay and Laybuy – have been up and running for some time.
Their services are available on a number of popular websites like H&M and ASOS.
The UK BNPL market is worth £6 billion and 20 million people already use this mode of purchase.
Due to its popularity, there are calls for rules on BNPL to be tightened as it becomes a more popular means of purchase for consumers and as the Financial Conduct Authority seeks to regulate the market.
Already, the regulator has asked companies to clarify their terms and conditions.
Apple will launch the BNPL
But the industry is ready for shockwaves when Apple hits the scene in the fall.
The tech titan will launch Apple Pay Later on its new iPhone in the US.
The service will work wherever there is Apple Pay both online and in stores.
The move will allow people to split payments on their phone into four installments, which they can pay over six weeks.
Zopa, which launched its BNPL service today, is focusing on large items worth between £250 and £30,000 to help consumers make larger purchases.
But experts say it’s best to save until you can make payment in full.
NatWest also plans to roll out the service starting this summer, after HSBC and other banks offer the payment option.
Meanwhile, Amazon has teamed up with Barclays to offer BNPL for orders over £100.
More regulation is needed
Citizens Advice is calling for more regulation to protect consumers, especially as one in 20 BNPL buyers admit they don’t fully understand how refunds work.
Millie Harris, debt counselor at Citizens Advice East Devon, said: ‘It’s heartbreaking to see parents who can’t afford clothes or shoes for their children turn to Buy Now Pay Later , thinking it does them a favor.
“Really, it’s just more debt and more creditors, on top of what they’re already dealing with.
“What scares me the most is how easily people can use Buy Now Pay Later.
“They come to rely on it much faster than other forms of credit. It’s just a few clicks at checkout.
“Too often that means people don’t realize how serious it is, that it’s a credit and that there are consequences if they don’t pay it back.”
Dame Clare Moriarty, Managing Director of Citizens Advice, added: “The debt spiral from Buy Now Pay Later to credit cards, loans and even payday lenders shows that this is not a risk free alternative.
“Buy Now Pay Later is part of the credit industry and urgently needs to be regulated as such.”
How to get debt help
Getting into debt, in any form, should always be a last resort. Interest charges can add up quickly, making it harder to pay what you owe.
Shoppers should use coupons and cash back where they can, instead of resorting to credit.
And experts say the bottom line is to never borrow more than you can afford to repay.
If you miss payments, it can impact your credit score, which could prevent you from getting a loan, credit card, or mortgage in the future.
If you’re worried about your debts, talk to your lender, who may be able to offer you affordable payment plans.
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