Buying now and paying later? How interest-free credit contracts can put you at risk 

The way that we shop is constantly evolving. Online markets give rise to new products, services and purchasing behaviours that are quickly adopted by consumers and obtain industry endorsement and investment. Yet, regulations can’t always keep up and the problems and pitfalls are never far behind. 

One of the biggest trends in online shopping in recent years is the use of ‘Buy Now, Pay Later’ credit (BNPL). Companies like Klarna and Clearpay allow consumers to purchase an item immediately even if they don’t have the funds by breaking up the cost and distributing payments over several weeks or months. Their popularity can be attributed with the rise of fast fashion, as consumers are put under pressure to buy new items more frequently than ever before, at the same time as they have less expendable income. 

You don’t have to be a financial expert to see how this could create problems. In this article, we’ll look at how these services work, the regulations and loopholes that exist in terms of consumer protection, and the kind of issues they create for consumers.  

What is ‘buy now, pay later’ credit? 

Buy now, pay later credit (BNPL) is one of the oldest forms of credit available to people in the UK. It was first used by catalogues and high-street retailers who wanted to incentivise shopping. By splitting the payments of expensive items into instalments, many shoppers would make purchases they otherwise wouldn’t. 

These schemes offer a short-term interest-free period. This means that customers who pay off the purchase during the stipulated time frame will only pay the original price. However, for those who can’t, the price may end up being 40% interest on top of the original cost of the item. 

Nowadays, this form of credit is a growing trend, promoted as a lifestyle choice for those who want to keep up with ever-accelerating cycles of fashion and gadgets. While this ‘repackaging’ has made it popular, especially among young people, it is misleading. BNPL is basically a high-interest credit contract with severe penalties for defaulting. 

What do these services offer?

Today, the industry is working to normalise BNPL as a popular payment option, even for relatively small or non-essential purchases. The financial arrangement is through a provider, with Klarna and Clearpay being two big names in this space, rather than directly with the retailer.

There are differences in what each provider offers. For example, with Clearpay you pay for goods in four fortnightly instalments which are interest-free if paid on time. And with Klarna, customers are given different payment options: paying in three instalments (automatically taken every 30 days) which is interest-free if you meet the payment dates; financing, where payments are spread over a longer period (usually up to 36 months) but charges and interest apply if you default on payments; and pay in 30 days. 

This final option is more controversial – it works on the basis that you might try before you buy and then return an item without paying anything. If at the 30-day point you’ve not returned them, you’ve bought the goods. However, there is a lack of clarity when it comes to things like delivery issues that mean you didn’t receive an item, or when a retailer’s terms and conditions give customers longer than 30 days to return an item. 

How is this becoming a problem for consumers?

Lawmakers, regulators and Government organisations often struggle to keep up with rapid changes in digital markets and the consumer landscape. While BNPL is going to be brought under FCA regulation, millions of people have already signed up for these types of credit arrangements and are facing all manner of problems. 

They may seem straightforward, but since 2020 Resolver users have raised almost 20,000 cases about BNPL. Looking at the problems our users are experiencing shows a hidden world of false advertising, debt, arrears and payment issues that may not be immediately obvious when you sign up. 

Debt, payment and repayment issues

Whether it’s taking on too many credit agreements or not understanding the T&C’s, customers are becoming victims of the ease of signing up to such agreements and getting into financial hardship. 

The deals are often hard to understand and keep on top of – with serious consequences if you don’t pay on time. Some of the unregulated services offered by these systems may not affect your credit report, but our users tell us they’ve been passed to debt collectors after getting into difficulties. 

Incorrect charges or problems with returns and refunds 

More than one in ten of complaints about BNPL raised through our system were about returns.

Whether it’s being charged for an item that never arrived or after it’s been returned, or being passed back and forth between the retailer and provider when querying a charge, there is a lot of murkiness in the process of getting these issues resolved. 

Lack of protection and cases of fraud

People do not currently have the usual full range of borrower protections when taking out this type of loan. With a lack of regulation comes a lack of accountability by these providers and less consumer protections. 

As BNPL increases in popularity, so does the risk of criminals taking advantage. We’ve had users complain about BNPL accounts being opened in their names without their knowledge.

How can we help?

Our free tool makes it easy to raise a complaint about BNPL. However, it is vital that consumers become better informed of the regulations, benefits and drawbacks of these credit agreements. 

BNPL also takes advantage of long-studied consumer biases, such as our drive for immediate gratification and unrealistic optimism about our ability to pay off costs in the future. In some upcoming articles on BNPL, we’re going to take a deep dive into the strategies they rely on to promote their services and how these can be resisted by canny consumers. 

If you have any thoughts on this topic, or any other consumer issues you would like us to cover, feel free to get in touch with us at support@resolver.co.uk.