Buy now, pay later can cost you a packet eventually
These deals may be tempting but they often have huge, hidden expenses, warns Chiara Cavaglieri
Saturday 15 February 2014
It is almost as if the credit crunch never happened. Walk down any high street, or flick through any TV channel and you are guaranteed to see an offer of buy now, pay later or interest-free credit for big purchases. Managed perfectly, some of these deals can be an acceptable way to spread the cost, but be warned: these credit agreements can have huge, hidden expenses.
Many leading mail-order companies offer "buy now, pay later" (BNPL) finance deals with no interest to pay and this can be an attractive option for anyone looking for a more flexible way to pay for goods. However, if you don't repay the entire amount in the specified time, you could face excessive charges.
For example, Argos offers a 12-month BNPL deal which charges no interest at all if you repay in full by day 365, but if you miss the deadline, you pay 29.9 per cent on the whole balance, backdated to the date of purchase. If you were to spend £350 on jewellery, that would equate to over £100 in interest, according to Which?.
The consumer organisation also found that Freemans backdates interest to the date of delivery, charging 34.9 per cent annual percentage rate (APR) if you don't pay off the full balance within the BNPL period.
Littlewoods charges even more at 36.9 per cent, but worse: it backdates interest to the date of your order, even if wasn't delivered until a later date. K&Co.com and Very, which are both part of the Shop Direct brand along with Littlewoods, also charge interest from the order date, but the revert-to APR is only revealed to shoppers "upon successful account application".
Gareth Shaw at Which? says: "Some 'buy now, pay later' deals may charge you interest on the whole balance even if you're just a single-day late in repaying, so always check the small print and repay on time to avoid hefty penalty fees."
Lenders should put all their charges in the terms and conditions but you need to be crystal clear in your own mind as to how these are applied. You may also be offered add-ons such as shopping insurance, or "life event plans" to cover your repayments if you are unable to work, but these can be comparatively expensive and difficult to claim on.
If you're buying a big-ticket item such as a car or furniture, you may be offered a hire purchase (HP) agreement instead. Typically, you put down a 10 per cent deposit and pay the rest in monthly instalments over one to five years with interest. This can work well if you are disciplined and put money aside each month, but look at charges as well as the APR because there may be administration fees at the beginning and the end of your arrangement.
Crucially, you must never lose sight of the fact that you do not actually own the goods until you have made all of the payments.
Forecourt finance in general can be complicated and the onus is on you to get to grips with the true cost of any agreement you make.
Lucy Burnford, founder of Motoriety.co.uk, says: "These plans can help you buy a car you could not afford to buy upfront but, when it comes to financing a car purchase, it's essential to read and actually understand the terms of the contract before signing anything. Boring as the small print is, it's crucial to know exactly what you're paying for."
Car dealers often use flat interest rates to make a loan look cheaper, because while an APR is charged on outstanding debt, a flat rate is charged on the original amount borrowed, which means that in the last year you still pay interest on the whole loan. As a very rough rule of thumb, an APR will be around double the flat rate.
There are pitfalls with personal contract purchases (PCP) too. Here, you are effectively hiring the car – with the option to return it, buy it for the agreed amount, or return it and make another deal – but the car's end value is decided at the outset.
David Black of Consumer Intelligence says: "PCPs are based on agreed mileages, and if you exceed that mileage there will typically be a fixed additional charge for each extra mile. If the car's not in good condition at the end of the agreement this could hit your pocket too as its resale value will be less. The finance agreement will be for an agreed term and it will generally be expensive if you want to terminate it early."
An unsecured loan is often a better option. If you have a decent credit rating you can get competitive rates of under 5 per cent APR if you're borrowing between £7,500 and £15,000.
Credit cards can catch you out too, so take the time to read the small print and if your credit-card company sends you a change of terms notice, don't ignore it.
Even leaving your card in a drawer could be an expensive mistake as some credit-card providers charge a fee if you don't use it regularly. These dormancy fees are relatively rare on new cards being issued but they may apply to existing cards and are more common on prepaid cards. Similarly, some store cards charge a "credit balance fee" for holding a positive balance. These cards already carry exorbitant interest rates, usually close to 30 per cent, but Santander-issued cards such as the Topshop and Debenhams store cards also whack you with a fee of up to £10 if you have a credit balance for three consecutive months.
Charlotte Nelson of Moneyfacts.co.uk says: "Try not be get sucked in by the discounts at the till as there are often better standard credit cards on the market. These cards not only have a lower rate of interest but they can even offer 0 per cent on introductory purchases for a fixed period and even cashback."
Avoid using a credit card for cash advances, which usually refers to ATM withdrawals but can also include transferring money into another account, gambling and betting transactions, traveller's cheques and foreign currency. Not only do you pay a separate, higher rate of interest (typically over 25 per cent), but you may also be charged interest from day one as well as a fee of around 3 per cent and foreign usage fees (around 2.99 per cent) to boot if you're using your card at an ATM abroad.
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