Warning over ‘unmanageable debt’ after shoppers spent £2.3billion on buy now, pay later to help fund Christmas

SHOPPERS are being warned about spiralling into “unmanageable debt” after research found that Brits spent £2.3billion online through buy now, pay later schemes ahead of Christmas. 

New findings from Credit Karma, a credit reporting firm, showed that one in four shoppers used these schemes in the run up to the holidays.

Those who opted for this payment method had an average bill of £170 - nearly 40% of their total Christmas spending.

Meanwhile, nearly half of under 35s relied on these payment schemes, with men more likely than women to make Christmas purchases this way.

Those living in London, the South East and North East of England also used this payment route more than average.

Credit Karma’s research doesn’t name any lender in particular but talks about “buy now, pay later” as a service on the whole.

It comes after debt charities urged shoppers against using “buy now, pay later” for Christmas over widespread debt fears. 

The schemes allow shoppers to buy items on credit and pay for it later, with payments usually spread out over several months.

The first payment can be made typically around a month later, although this varies depending on the website you use.

If you are unable to pay an instalment on time, then you can be slapped with late payment fees or chased by debt collectors. 

Klarna, Laybuy and Clearpay, are just three of the lenders offering this “buy now, pay later” financing in the UK. 

It also may use debt collection agencies to recover the outstanding balance.

Late payment fees can cost up to £24 a month

Laybuy charges a £6 default late fee if the repayment is not made within 24 hours after the due date. 

A further £6 will be charged every day, capped at £24 - meaning you could face this extra cost on top of your outstanding purchase.

If a Clearpay user misses a payment, the provider will give them till 11pm the following day to make the repayment.

If it isn’t paid, a late fee of £6 will incur. 

The customer will then be hit by another £6 fee every seven days although the late fees will go no higher than 25% of the item purchased. 

This means you can end up building up more than up to £24 a month in fees on top of the original outstanding purchase.

But the company will stop customers from making any more purchases if they miss a payment. 

For Klarna’s “Pay Later”, which includes paying in three instalments or within 30 days, there are no interest fees, surcharges or late payment penalties in the UK.

Credit score will also not be impacted even if you have failed to pay on time.

But the company also says that if an order is not paid on time by the due date, customers will no longer be able to access the firm’s payment options for future purchase. 

While some companies have slashed late fees and brought in provisions to try and stop users’ debt from spiralling out of control, experts say the schemes themselves can encourage consumers to spend above their means. 

Martin Magnone, CEO of Tymit - a digital credit card provider- said: “The reality is these schemes work with retailers to encourage higher, impulsive spending – which all comes at a substantial cost for the consumer. 

“There are very few, if any, affordability checks for users to see how a purchase will affect their finances, and there’s no easy way to see all of their spending in one place.

"This makes missing payments easier and is pushing more consumers into unmanageable debt.”

Meanwhile, Kevin Mountford, co-founder of Raisin.co.uk - a savings market place - said that the default and missed payment fees can total between £24 and £30 a month even if the providers do not charge interest.

He said, on an already borrowed balance, these charges will stack up, as will “the mounting pressure of being chased on a regular basis.”

He said: “With the UK now in a third lockdown and many facing the financial hurdles this brings, weighing up each financial purchase should be an immediate priority.”

The latest research comes after a separate warning from Money and Mental Health Policy Institute, founded by Money Saving Expert's Martin Lewis, claimed people with mental health issues were more likely to be exploited by “buy now, pay later” services.

The debt charity suggested people with a range of mental health issues often struggle to control their spending.

This, combined with pushy tactics from retailers like marketing emails and personalised recommendations, also increase the risk of overspending.

A Klarna spokesperson said: "We do not charge interest or late fees on our most popular products, give customers clear repayment schedules, and we assess eligibility each time someone makes a purchase with Klarna to ensure consumers are not spending more than they are able to afford.”

A Clearpay spokesperson said: “Our extensive inbuilt protections mean we do not allow our customers to fall into a revolving debt trap. We do not charge interest, our late fees are capped and we automatically pause an account if a single payment is late.

"These rules help ensure we are always protecting our customers and that they are only buying items they can afford.”

Gary Rohloff, managing director of Laybuy said: "Laybuy is six weekly payments which means that our customers who bought Christmas gifts early during the Black Friday sales have now already paid for these items in full.

"A typical Laybuy customer spends around £65 and unlike other BNPL providers, we do a hard credit check beforehand to make sure they can afford to pay in the first place." 

The regulator of the financial industry the Financial Conduct Authority (FCA) .

It comes after "threatening" debt letters that "make people suicidal" were banned in October after a campaign by Martin Lewis.

We reported on how an online shopping sprees using "buy now, pay later" schemes left one shopper £1,500 in debt and homeless.