It’s the time of year when the purse strings are being loosened in the run into the festive season.
Most of us are at the stage where we’re at least starting to plan for the months ahead and, more importantly, how we’re going to finance and manage the annual Christmas spend.
Following at least two years of fairly steep price increases, unless commensurate pay rises have been awarded, many of us are likely going to feel the pinch more than ever this year.
Some will look towards a loan or other arrangement to get them through what is an expensive time of year while others will avail of the increasingly popular ‘buy now, pay later’ means of financing.
The Central Bank has issued guidance on the ever-expanding payment method warning consumers to be mindful of the terms and conditions attached to such deals.
What is it?
Perhaps a more modern form of what would once have been known as ‘in-store credit’, Buy Now, Pay Later (BNPL) is a credit arrangement that allows a consumer to buy goods or services and to spread the cost over a period of time, usually months.
Traditionally, this form of credit would have been used for relatively ‘big ticket’ items such as furniture or televisions, but increasingly it is being offered as a means to pay for items like clothing and smaller electronic items, for example.
The BNPL provider is not usually the shop where the item is being purchased. This arrangement typically involves the customer entering into a separate contract with a credit provider.
A down-payment – or first installment – is paid by the customer and interest is not usually charged on the remainder, which is a loan, but sometimes it is.
Most agreements include administration fees, as well as charges for late or missed payments.
The Central Bank conducted research on BNPL which uncovered a fairly low level of awareness among consumers of the risks associated with the credit arrangement.
Just over a third didn’t understand that it was a form of credit and not an actual payment.
Around one in five admitted to not having a full understanding as to how BNPL works, which – as the Central Bank warns – could inadvertently lead people into an inability to pay.
“Before you buy, make sure you have budgeted beyond the initial payment, as missed payments could bring a financial cost and have an impact on your future credit profile,” Gerry Cross, Director of Policy and Risk at the Central Bank warned.
“And if you are finding that you are relying on short-term credit to pay for things that you could budget for previously, this could be a warning sign of potential financial difficulty,” he added.
Indeed, nearly half of those surveyed in the Central Bank study said the availability of BNPL had led them to spending significantly more than they had planned.
Although in many cases BNPL arrangements do not attract interest payments, some versions do.
Typically, there may be an interest-free period in which payment can be made without incurring costs, but beyond that timeframe, a rate of interest is applied to the outstanding amount.
According to the Money Advice and Budgeting Service (MABS), typical interest rates range from between 3.99% and 39.9% APR (annual percentage rate), although an interest rate cap of 23% was introduced by the Central Bank last year for regulated providers.
“It is important to be aware that interest rates are variable and the amount of interest you are charged can change daily,” MABS pointed out.
In more traditional financing arrangements, a formal payment plan is agreed with an interest rate attached, which the borrower should be informed of at the point of purchase.
In most cases when it comes to BNPL financing, late fees and penalties apply which can be reflected on credit reports, thereby potentially affecting the ability to borrow in the future.
In May of last year, the Central Bank introduced regulations requiring providers of BNPL services to be authorised by the Central Bank, thus extending consumer protection measures to those who avail of such services.
The legislation also included the measure to limit the maximum interest rate chargeable on such financing arrangements to 23%.
There is also an onus on the firms to act responsibly and to ensure that the terms and conditions of their products are clear and transparent for customers.
“Consumers must be informed clearly of all relevant information, so they can make a fully informed decision on whether this product is right for them and the Central Bank continues to monitor these areas,” Gerry Cross said.
Pros and cons
Once consumers are aware of what they are signing up to, ‘buy now, pay later’ has its place and can offer benefits.
It can provide a means for consumers to secure an item now and pay for it when they get their next pay cheque, rather than risking a delay only for the item to no longer be available.
If an interest-free period is offered, the service needn’t cost anything once payment can be made within the specified period. In fact, it can work out much cheaper than taking out a personal loan.
It can also work out less expensive than putting the item on a credit card.
On the downside, it can encourage consumers to ‘impulse buy’, which can lead to expensive purchases which could end up in late payments that may attract interest and late charges.
Missed payments could in turn impact an individual’s ability to get loans or other credit in the future.
Record spending expected on bargains
Although a majority of consumers expect to pull back on the volume of their purchases this Christmas, the reality is that they will likely end up spending more than they did in each of the last few years.
According to research by KPMG this week, 80% of survey respondents said they were preparing for higher costs for both gifts and food in the lead into the festive season, with around 60% saying that they would manage that by pulling back on spending on retail or entertainment.
“They’re doing more research, and actually doing their shopping earlier – looking around for deals, being much more focused on value for money this year,” Keith Watt, Head of Retail at KPMG said.
That is apparent in a separate piece of research conducted by AIB this week which appeared to suggest that consumers would rely on discount retail days like Black Friday and Cyber Monday for more of their Christmas shopping this year.
It forecast that the online spend on Black Friday would surpass last year’s record-breaking total.
AIB’s research indicates that Irish consumers spent in excess of €95 million online on Black Friday in 2022, with a record-breaking 900,000 transactions, making it the busiest online spending day ever.
Online shopping days like Black Friday and Cyber Monday are prime opportunities for fraudsters to make a killing.
Both AIB and Bank of Ireland have been warning customers to be on the alert to scams in the days around each of the upcoming events, particularly when it comes to deals that look like they are too good to be true.
“Fraudsters like to inject an element of urgency into their offers or fake adverts, but don’t rush a transaction without checking things properly first,” Nicola Sadlier, Head of Fraud at Bank of Ireland warned.
“Verify if websites and apps are legitimate and be extremely careful with online adverts, texts or e-mails,” she added.
One key measure that consumers are being urged to be on the look out for on websites is the presence of the padlock symbol and to ensure that ‘https’ is in the browser address window, especially on a page where bank card details or personal information is being inputted.
AIB warned consumers to be on the alert for text messages or calls purporting to be from a bank during the upcoming cyber shopping days.
If in doubt, hang up and call the bank on their advertised number to check if a call is genuine, it advises.
Finally, a simple but potentially costly mistake. If using a shared device, be sure to log out of the site when finished shopping to ensure that there isn’t a risk of personal details being used by anyone else.