Buy Now Pay Later – why it often goes badly wrong

Buy Now Pay Later (BNPL) and other deals promising no interest sound so appealing. And so sensible if you are short of money.

But very often you end up being charged large amounts of interest.

The retailers offering these “bargains” know this happens and that they will make a lot of money from them

So what goes wrong? Here are three things to look out for if you see one of these offers.

1. Backdated interest – it’s a killer

Many people don’t read the details on these deals and they assume interest is only charged after the end of the deal. But there is often a clause saying that if you haven’t paid for the item in full by the end of the period, interest is added from the start.

For example:

Argos says If you don’t pay it off in full before it ends you’ll incur interest from the date of purchase.

Very says: Interest is calculated from point of order and charged at the end of the payment free period, if you haven’t paid in full.

PC World says: if you decide not to pay the outstanding balance at the end of the 6 month period, interest will be charged from the date of purchase.

If you have been making some payments but not managed the whole amount, this seems totally unfair. Citizens Advice gives the following case:

a man who bought a £600 iPad from a catalogue company on a year-long interest free deal. He still owed £100 at the end of the interest-free period, and was hit with a backdated charge of nearly £700 interest – more than the original cost of the iPad.

2. Complicated repayments

One of the benefits of these offers is their flexibility – you can pay more in a good month. But because of this, lenders don’t offer a simple way for you to repay the whole amount by the end.

Many people would like to pay it off in equal amounts each month, but lenders don’t make this easy by allowing people to select this as an option when they buy the goods.

It can be particularly complicated if you also have a balance on your catalogue account that you are repaying as well as the BNPL item. For example, Littlewoods says:

If you have any non Buy Now Pay Later purchases on your account you will still need to make at least your minimum payment as detailed on your statement. Remember to allocate your Buy Now Pay Later Payment to the specific item you wish to pay off. 

So these complicated repayment arrangements make it easy for someone to pay less than they may have planned, and end up with a large interest bill at the end.

3. Over confidence

Faced with a Buy Now Pay Later offer, it very easy to say Yes because you get what you want now and it feels as though you can easily pay it off in the next six or twelve months.

Behavioural economists call this Present Bias. It’s human nature to see immediate benefits as more important and larger than the more distant pain of paying for the item. I have looked at three examples Grocery shopping, Netflix and Procrastination before.

It happens with BNPL offers because we focus on what is happening now – we get the item without having to pay for it – and don’t think clearly about how hard it is going to be to make the future payments.

For example, you know you are short this month because you have just been to an expensive wedding or there has just been a big MOT bill on your car, but you don’t think that in the next year September will be hard when the kids all need new school uniforms and you will be very short of money in December.

It’s also easier to over-spend if you aren’t handing over cash.  You may choose a higher spec laptop or washing machine because it looks like a good deal, even if you didn’t need the extra features. Here even if you do pay it all off in the BNPL period so avoid the interest, you may still have paid more than you originally wanted to spend.

How to avoid these traps

I’m not saying don’t choose a Buy Now Pay Later deal. They can be great ways to spread the cost of buying something if you can pay it off within the term. Cheaper than putting it on a credit card and massively cheaper than going to a Pay Weekly stop such as Brighthouse.

But you need to plan to repay it earlier than the last day. Don’t let your mind get away with thinking you can start paying for this next month. Paying off a 12-month deal in 8 equal payments makes it a great bargain for you and gives you a bit of wriggle-room if you can’t make a payment in a couple of months.

And be honest with yourself. If it’s going to be hard to make those payments, then this isn’t a clever purchase, it’s an expensive trap.

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