Would you borrow money to buy a dress? Would you get a loan for a takeaway?
That’s what thousands of people in Ireland are now doing. ‘Buy now, pay later’ is increasingly being offered as a way to pay by retailers and service providers. From fast fashion to teeth whitening, Deliveroo to Botox, you don’t need to have the money to get what you want.
Buy now, pay later (BNPL) used to be how our parents’ generation paid for big ticket purchases. It helped spread the cost of “investment” items like a sofa or washing machine over time, making it more manageable.
The service however has flipped from being a budgeting tool for necessities to being a gateway to a lifestyle that might otherwise be aspirational.
Retailers and service providers are teaming up with lenders like Klarna, Humm and others to allow customers to spread the cost of products and services they can’t immediately afford. Revolut offers a ‘pay later’ option too.
One in four shoppers in Ireland say they would consider using a ‘buy now, pay later’ service to buy items otherwise outside their budget, according to Central Bank research. What many don’t realise is that by paying this way, they are taking out a loan.
Concerns are growing around the ease with which borrowers can build up unaffordable debt.
How does it work?
Users of buy now, pay later tend to be younger, aged 25 to 44, according to the Central Bank of Ireland research. Those who would consider using it in future are more likely to be female and work in managerial, professional or administrative roles, the research says.
Common examples of products purchased include electrical goods, mobile phones, clothing, footwear, beauty and cosmetics.
Do you fancy a North Face puffer jacket from online fashion retailer Asos for €240? It doesn’t matter that you can’t afford it right now. By using Klarna, the ‘buy now, pay later’ option promoted by Asos, you can split the purchase into three payments, 30 days apart. You could be wearing that jacket tomorrow for just €80.
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Shopping online, you’ll typically find standard payment options like Visa and Mastercard when you go to the online checkout to pay. In the case of Asos, the Klarna “buy now, pay later” option is presented upfront beside the product. The message is, you can have this product now, even if you can’t pay for it in full.
Or maybe you’d like a Thai takeaway, but it’s the week before pay-day. Get Deliveroo to drop it to your door and using Klarna you’ll pay just one third now. It will be February before you have to pay off your Pad Thai.
Buy now, pay later is often just presented as another way to pay, but unlike cash or a debit card, the money you are paying with is borrowed and will come with fees – many people don’t understand that.
“We are now in the situation that for many online stores, buy now, pay later, appears as the default payment option rather than payment in full,” says Michelle O’Hara from the Money Advice and Budgeting Service (Mabs). “There is a strong perception that this is just a payment method, not a loan,” says O’Hara.
More than one in five people in Ireland using buy now, pay later said they didn’t have a full understanding of it, according to the Central Bank. More than one in three saw it as a payment method rather than a form of loan. Shoppers tended to focus on the lower monthly payment amount rather than the total amount borrowed at the point of purchase.
It’s no wonder consumers are confused. Think about a bank loan and you expect a lengthy application process with probing questions. Buy now, pay later approval however can take minutes with little required except a phone number and email address.
“The requirement on the provider depends on how much you are borrowing,” says director of communications with the Competition and Consumer Protection Commission, Grainne Griffin.
“If it’s under €500 there aren’t the same requirements on firms in terms of checks, and there are also not the same consequences for missed payments in terms of your credit record, although with European legislation, that is quite likely to change,” says Griffin.
Defaulting on buy now, pay later loan amounts over €500 now however will affect your credit record, making it hard for you to get another loan or a mortgage.
Some providers say they use multiple data points to assess your suitability for buy now, pay later. Shoppers after midnight for example may be turned down. Try in daylight hours however and you will likely be approved.
Consumers in Ireland are also using buy now, pay later for cosmetic treatments. Botox can be pricey and several Irish providers like Therapie, Sisu and the Institute of Dermatologists partner with buy now, pay later provider Humm. Doing so enables providers to sell more by giving them access to a cohort of customers who can’t afford to pay the full cost upfront.
How do they make money?
If you have sufficient funds in your account to meet the three Klarna instalments on that puffer jacket as they fall due, you won’t pay any fees and you’ll have a nice jacket.
So how do buy now, pay later services make money? It varies by provider. Take that puffer jacket purchased on Asos using Klarna. The first instalment of €80 will be taken from your card when you place your order. The next two payments are taken automatically at 30 and 60 days later. With this Klarna pay in three service, you won’t be charged interest, but if there are insufficient funds in your account, fees start to build up.
If you miss the payment at 30 days, you’ll get a so-called courtesy period of two to seven days to update your payment method or add sufficient funds in your account.
If you can’t, then your loan is in default. You’ll be charged a late fee of €3 for orders under €100, or €8 in the case of the jacket which falls in the €200 to €500 range.
The full unpaid amount and charges will be rolled over to the next and final instalment – so on day 60, about two months since your jacket arrived, your account will be charged the outstanding €160 for the jacket as well as the late fees.
You can extend the due date of a repayment by ten days at a cost of between €2 and €4 for order values up to €500. You can’t extend for orders over €500.
If payment is still a problem, Klarna will start debt collection procedures against you where you may have to pay “all reasonable costs” incurred by them and their debt collection agency.
If you decide to return the jacket because it’s too small, just hope it doesn’t go missing in the post and that the systems at Asos and Klarna are talking to each other.
“Ultimately these products are there to make money,” says Griffin of buy now, pay later products generally. “They do drive a profit and consumers do pay fees.”
What about the skin treatments bought through Humm? Humm provides an illustrative “quick quote” for a €2,700 treatment bought from the Institute of Dermatologists. If you use Humm to pay for this, there will be an “application” fee of €40, 12 monthly instalments of €231 and 12 monthly account keeping fees of €3.50 each.
Paying this way means it will cost you about €155 extra on top of the €2700 price. A “dishonour” fee of €9 is applied where an instalment is late by more than 24 hours. If unpaid, the fee will be added to the outstanding loan balance and interest will be charged on this too.
Humm says their terms vary by retailer. Using Humm to buy things from two different providers can mean different fees – interest can range from 0 per cent to 14.99 per cent, the application fee can range from €10 – €50, and account keeping fees can range from €1 to €20.
It’s complicated
Using ‘Buy now. pay later’ makes any purchase more complex, says Grainne Griffin. “Instead of one deduction from your current account, you are probably going to see at least three deductions – so managing your personal spending has just got three times more complicated,” she says.
“And then when you purchase something else, it just gets three times more complicated again.”
Paying for a takeaway you ate in October at Christmas, or a swimsuit bought in August in October can wreak havoc on any attempt to budget your way through a month.
Some ‘buy now, pay later’ services will send a notification telling you when the payment is about to hit. But if you’ve got other unexpected expenses like medical bills or your car clapping out that month, you may have to default. This just pushes a bigger bill down the line making it even more likely that you will continue to default.
If in the week before pay-day, you don’t have enough money in your account to pay for an expensive hair styling iron upfront, will things really be much different in 30 and 60 days time when it will also be the week before pay-day?
Indeed, those who are currently using buy now, pay later or have done so in the past are more likely to have other borrowings, according to the Central Bank. They report higher rates of borrowing compared to the rest of the population too.
People can be using numerous different buy now, pay later providers and it can really accumulate, says Griffin. “It might not look like a huge amount with any one provider, but it can build up and people can be in quite unmanageable financial circumstances without any provider shouting stop.”
Stick to a budget
Buy now, pay later is associated with impulse shopping and excessive spending, according to the Central Bank data. Almost one in four users said they were more likely to purchase things they didn’t need. More than 43 per cent said they often spend significantly more than they planned.
It’s no wonder retailers are pairing up with buy now, pay later services and pushing this option hard.
“Always consider, number one, ‘Do I really need this product?’ ” says Michelle O’Hara of Mabs. “Or can I get it for a better price if I shop around.”
“Ask yourself, why am I using buy now, pay later – is it because I actually can’t afford the product – because that needs to be given serious consideration,” she says.
“You may be getting products that you don’t have the means to pay for.”
