Buy now pay later — why consumers should be wary

Have you noticed how easy it is to pay for everything on credit? Klarna one of the credit providers offering buy now pay later payment options for consumers has come under the spotlight as the government calls on the FCA to provide guidance and rules.

Buy now pay later options

The buy now pay later industry offers consumers the option to repay over instalments. When they do this they enter into a credit agreement with the lender and if they fail to pay their instalments they default on their credit agreement.

This service is usually only presented to consumers at the checkout with not much warning about the risks of taking out credit. The ease of signing up to this service has seen a surge in customers using this option at online clothing stores such as H&M and Boohoo on any amount even as little as £30.

FCA’s report

The FCA’s report into the unsecured credit sector and the potential harm it can cause as people are unaware of the risks called for further investigation into the way in which this market has developed. Klarna has responded to the report by calling for regulation as they believe the use of their service can positively impact consumers’ credit scores and improve their financial position.

The risks

When customers choose to buy now pay later at checkout no assessments are carried out on the consumers’ ability to repay the outstanding amount in the normal way such as when purchasing insurance, a car or applying for mortgage and they can incur interest if they fail to repay their instalments.

This means that information is not shared with credit reference agencies so when assessments of affordability are carried out in future lenders will not be able to take into account their full financial position, that is whether using Klarna would have had a negative impact or even a positive impact on their credit score and runs the risk of other lenders making decisions as to credit limits or payment schedules which could harm the consumer.

Buy now pay later is put in front of consumers as a way of ensuring a smooth payment process and is largely a response to the Covid-19 pandemic however, we don’t know yet what the actual impact will be and therefore, rules that encourage a more sustainable market are needed.