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Buy Now, Pay Later: The Risks of Delaying Payment

21st December 2016

Buy now, pay later deals sound great on the surface. Consumers can get what they need (or want) without immediately having to manage repayment. But the deal comes with a catch if you don’t handle the debt fast enough. And it will hit you straight in the wallet.

As reported by the BBC, failing to repay the full amount by the agreed upon date means you owe all of the accumulated interest based on the original purchase date. And it shows up on your statement all at once. To make matter worse, interest rates on these debts are often higher than traditional credit card options.

Catalogue and mail order systems are a common source of this kind of debt. Local charitable organization Citizens Advice works with thousands of 20-somethings struggling with these “buy now, pay later” deals.

How Buy Now, Pay Later Works

For those who haven’t encountered this shopping paradigm, here are the basics of the “buy now, pay later” system.

First, a customer selects an item and agrees to the terms. Then, the buyer is regularly billed for the purchase and is not subject to interest if the items are paid-in-full before the deadline. However, paying the debt off isn’t required during that period. And this is where the trouble begins.

If you manage to pay off the debt in the allotted time, then no interest is owed. You get the item at the initial purchase price and that is that. However, if you fail to pay off even £1 before time runs out, you owe all of the back interest. In some cases, the interest charges are larger than the original purchase price of the item. And a debt of that size is often quite a shock.

Financial Regulation

The Financial Conduct Authority (FCA) is reviewing the terms associated with catalogue debt deals. This includes inquiries into the high costs linked to these forms of short-term credit as well as how thoroughly the programs are explained to borrowers. Additionally, questions regarding the performance of affordability checks and any debt collection methods in use are being investigated too.

Citizens Advice hopes that clearer explanations would help consumers avoid bill shock if they fail to repay within the time period.

What Consumers Can Do

Consumers concerned about catalogue purchase debt have a few options. First, review any current catalogue debts on which you are paying. Note any due dates regarding when the interest-free period ends. Make every effort to repay on time to avoid the interest charges.

If you’re considering a catalogue purchase, review the associated “buy now, pay later” terms carefully. Make sure you understand how long the interest-free period is and how much you need for each payment to avoid interest charges. When possible, pay the debts off faster to ensure your plan to avoid interest doesn’t derail.

For those who are concerned about repaying the debts before the deadline, then catalogue shopping isn’t right for you. Instead, work on saving for the item you want to buy, and purchase after you have the required funds.

The easiest way to manage debts is to avoid them in the first place. Your financial life is in your hands. Take care to protect it whenever possible.