Can’t pay, we’ll take it away

Buy now, pay later; sound good? Well, more than 70 cross-party MP’s are calling for regulation of buy now, pay later firms such as Klarna, Clearpay and Laybury, in an attempt to stop consumers falling into debt.

These services offer the ability to spread the cost of a purchase; by delaying the payment by 30 days or making payments over a number of instalments. They are offering this without any interest, but there can be fees, sometimes large fees, if payments are not made on time. As well as causing an individual to fall into debt, this could also affect their longer term borrowing options as a result of poor credit, for example securing a mortgage with a lender.

With the country in and out of lockdown, many of us have increased our online shopping habits and this has seen the use of these payment schemes increase by around 35%. This is a worrying figure, especially given that the Financial Conduct Authority (FCA) who regulate the financial services industry does not currently have any powers to intervene and users could end up running up more debt than they can manage.

Credits cards can offer an alternative option for deferring payments, but these are regulated, which provides some additional protection for the consumer. However, this also comes down to an individual’s ability to repay what is owed, as we know credit cards also have the potential for people to accrue large amounts of unpayable debt.

Personally, I think the use of a budget is a great way to manage your money and ensure that you are not over committing yourself. When it comes to credit and financing, shoppers should ask: “Is this an essential item or is this a nice to have?”

It’s definitely easier said than done when it comes to sticking to a budget, but in these challenging times it is important to be aware of the risks of spending on credit. I would always encourage longer term security over the short-term high of spending online.

UPDATE

Since this post MP's have now voted (13th January 2021), but were unable to push an amendment Bill through Parliament. This potentially leaves many vulnerable individuals at risk of accruing large amounts of debt, as people continue to opt for deferred payment schemes. 

The FCA are conducting a review of the unsecured credit market, which is positive, but it could still be some time before we see more formal regulation of buy now, pay later firms. 

In the meantime I would continue to ask individuals to be conscious of the risks and encourage longer term security.

The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.

“Many people have [financially] overcommitted themselves using buy now, pay later companies, and we are facing mass redundancies, furloughing, and drops in income. So even if you think you could afford it now, you might not be able to later,” ”