With Christmas edging nearer, new research reveals the extent to which UK consumers plan to use ‘buy now pay later’ services over the festive period. So does this trend indicate the UK is facing a debt crisis? Let’s take a look.
What are buy now pay later services?
Buy now pay later (BNPL) services allow you to buy goods or services, and spread out the cost of repayments. This means you don’t have to fork out the full cost at the time of purchase.
The use of BNPL has grown substantially over the past few years. Popular providers include Klarna, Clearpay and Laybuy. In September this year, Monzo launched its own BNPL service, becoming the first UK bank to do so.
Unlike traditional lending, BNPL firms don’t charge interest, though late payment fees do apply. Hard credit searches also don’t apply with most BNPL services. This means even those with poor credit scores can often use these services as a way to borrow. (Note: Monzo’s new service does require a hard credit check.)
As they don’t charge interest, BNPL services typically make their money from the retailers they work with. That’s because retailers will usually pay BNPL providers for giving their customers the option of paying in instalments. In theory, this means customers are able to spend more, creating a win-win situation for the retailer and BNPL provider.
What does the new research reveal?
New research from Citizen’s Advice reveals that almost 1 in 10 Brits (9%) plan to use BNPL for part of their Christmas shopping. Interestingly, 59% of respondents say they’ll be using their debit cards for Christmas gifts. This compares to 41% who say they’ll use cash. Meanwhile, 36% say they’ll be relying on a credit card.
Out of the 43% who said they’ll borrow to buy gifts, one in five will be using BNPL.
What should UK consumers be mindful of when using BNPL?
Commenting on the results of the survey Kate Hobson, consumer expert at Citizens Advice, warned that BNPL services shouldn’t be used as an excuse to overspend. She explained: “Money can often be tight in the run-up to Christmas, but it’s still really important not to spend more than you can afford.
“If you’re considering using buy now pay later, make sure you understand what you’re signing up for, how you’ll make the repayments and what will happen if you can’t pay on time.”
Aside from not spending more than you usually would, it’s also worth bearing in mind that if you use BNPL, then you don’t get the typical section 75 protection that applies to most credit card purchases over £100.
In other words, if you buy something on your credit card through a BNPL provider and you encounter a problem, you’ll have to rely on less the valuable chargeback protection instead.
For more pitfalls of BNPL, see our article that outlines the dangers of using buy now pay later.
Does growing use of BNPL suggest a UK debt crisis?
While the growing use of BNPL services means UK consumers are content to spread out the cost of Christmas purchases, it’s worth recognising that BNPL can be a cheap way to borrow. This is true as long as you know you’ll be able to afford the repayments when they’re due. If not, you’ll pay the price in the form of late repayment fees.
Because BNPL is a cheap way to borrow, its growing use shouldn’t automatically signal the UK is in a debt crisis. In fact, BNPL is often a far better alternative than using a bog-standard credit card. That’s because normal credit cards often have a representative APR rate in the region of 30%.
Despite this, however, if you are looking to borrow for Christmas and you know you can afford to repay your balance, a specialist 0% purchase credit card may offer more flexibility. That’s because these types of credit cards also allow you to borrow at no cost whatsoever. This is the case as long as you keep to your credit limit and clear your balance before the 0% period ends. You must also make the necessary minimum repayments in the meantime.
Right now, it’s possible to borrow for up to 23 months at 0%, giving you more flexibility than using BNPL.
For more information on how these cards work, plus details of the longest 0% cards, see our list of the top-rated 0% purchase credit cards.
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About the author
Karl is a writer specialising in investing and personal finance content. He regularly contributes articles on savings, bank accounts, mortgages, and loans. He was previously a Personal Finance Writer for MoneySavingExpert.
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