Beware of the ‘pay later’ Christmas shopping debt trap
Buy now, pay later âis the message that online payments company Klarna uses to get people to spend, spend, spend as Christmas approaches.
But critics fear that the rise of this payment method, which could lead to one in ten shoppers using it to buy gifts, could create a mountain of personal debt and leave many people in fear of being harassed by debt collectors.
While the ads focus on the positive – nothing more than Klarna’s previously used “Get Smooth” slogan featuring American rapper Snoop Dogg – the negatives are not mentioned. They are many. If the purchases aren’t paid, you could end up with a debt collector knocking on your door demanding payment with interest – or being fined if there’s only one day of delay with money.
Persuasive: Klarna’s “Smoooth payment” commercial with rapper Snoop Dogg
Swedish company Klarna is the largest operator in the immediate buyout market with over 15 million customers spending Â£ 2.7 billion a year in the UK.
Others include Clearpay, owned by Australian tech company Afterpay, and UK company Laybuy. Their business models are simple. Rather than using money in your pocket or bank account, customers are given a pitch for âgetting the shopping experience you deserveâ – and not worrying about footing the bill immediately.
Online stores such as Boohoo, Asos, Made and H&M have embraced these new companies as a way to attract more customers, though they are remitting up to 5.4% of every sale – plus 20 pence – to the privilege.
Customers are drawn to not having to pay for 30 days or paying in three monthly interest-free installments, with the first paid immediately.
These payment options are featured in online stores. For example, on Made’s website, customers can click a Â£ 599 button for a new sofa or pay “Â£ 199.67 per month (interest free) with Klarna” now and over the next two months.
Klarna emphasizes that those who use her payment options will not compromise their credit score as long as they stick to their payments. But it emerged last week that Klarna’s losses were skyrocketing due to a surge in the number of clients unable to repay their loans.
Some providers, including Clearpay and Laybuy, hit customers with a fee of Â£ 6 if they are only 24 hours late with their payment – then charge an additional Â£ 6 if the late payment is not not done in the next seven days.
Debt charity StepChange fears that the immediate buyout industry will leave many people facing financial ruin in the New Year if they are unable to pay for the goods they have purchased from the bank. approaching the end of the year celebrations.
Sue Anderson, of the charity, said: “Easy borrowing can be good for in-store sales, but it increases the risk of many consumers going into debt.”
She adds: “We need regulations in place to prevent easy debts from causing misery to more people. It will only get worse as Christmas approaches. Credit should not be sold as an accessory. These buy-now and pay-after offers promote a lifestyle that in many cases leads to debt. ‘
24-year-old Chloe Porter fell into the debt trap. She first became aware of Klarna when her ads popped up while she was browsing online.
The Birmingham nursery nurse says: âMy finances were tight, but not out of control. But Klarna started showing up on just about every online checkout I’ve used – and when I used it to shop for clothes and upholstery that I couldn’t really afford, the debts ran high. snowballed. Struggling to keep up with the monthly payments, Chloe received correspondence explaining that her contact details would be forwarded to a collection agent if she did not pay. âI felt hopeless,â she says. âI was drowning in a sea of ââdebt. But all the time I was being chased for money, Klarna always allowed me to buy more goods. Businesses like this that target young people should be regulated.
Chloe, who has a one-year-old daughter Poppy, turned to StepChange for help. This consolidated her debts which stood at Â£ 5,000 and she is now slowly paying them back. Millions of shoppers welcome Klarna as it makes it easier to shop when they are strapped for cash. It is also relatively easy to return items such as clothing that does not fit before you need to pay. But last December, the Advertising Standards Authority banned Klarna from using ads with the slogan “a total mood booster” on the grounds that deferred payments don’t necessarily make people feel better.
Activist Alice Tapper has created a Go Fund Yourself website to highlight the danger of buy it now and pay later programs. Tapper – who has 50,000 social media followers and a degree in behavioral economics – said, âBuy now, pay later is slipping through the net of regulation. There are no clear rules on how it should be marketed. Patterns that lead to poor decision making by some consumers need to be better controlled.
Buried in the fine print of Klarna’s terms and conditions, it says, âWhen payments are frequently missed, Klarna may use debt collection agencies to collect your outstanding balance. “
According to Citizens Advice, those prosecuted for arrears by a bailiff can expect to face an initial fine of Â£ 75. Failure to pay, resulting in a debt collector knocking on your door, may result in an additional penalty of Â£ 235 and a 7.5% charge on any amount owed over Â£ 1,500. This means that a debt of Â£ 2,500 can result in penalties totaling Â£ 150.
Those unable to write off debt face the added disgrace of being charged Â£ 110 for repossessing valuables and auctioning them off.
Clearpay’s terms state, âWe give you until 11:00 pm the next day to issue your refund, and then you will be charged a late fee for a missed payment that is not resolved. This will be an initial amount of Â£ 6 and an additional charge of Â£ 6 if payment is not made within seven days. ‘ Supplier Laybuy says: ‘If you don’t pay within 24 hours of the due date, we’ll charge you a default fee of Â£ 6. If you do not correct your default by making the missed installment payment within the next seven days, we will charge you an additional default fee of Â£ 6.
In February this year, the Financial Conduct Authority admitted that the buy-out industry needed to be regulated “urgently”, saying its practices could cause “significant potential harm to consumers.” Unfortunately, it hasn’t done anything yet, with regulation likely next year at the earliest.
In October, the Treasury released its own report on the sector with industry responses sought by January. Klarna told the Mail on Sunday on Friday: “We are only easy to use if you are able to repay. We do not offer an open line of credit with high interest charges like some credit cards do. The average outstanding debt is only Â£ 48 and over 40 percent of customers are prepaying. ‘
The Financial Conduct Authority said: âBuy-it-now and pay-for products need to be regulated. We will consult soon on the new rules.
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