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How ‘lifestyle’ spending choices are luring a generation into debt

Shane Hickey
Photograph: Alamy

The prospect of buying a sofa or a new kitchen used to be an intimidating prospect for many households – a large outlay that would blow the budget. But then came “buy now, pay later” credit, which meant families could buy in store and spread payments over a few years.

These loans soon gained a bad reputation and shrank away, but did not vanish. Now they have re-emerged, rebranded and aimed at a technologically aware generation of shopper – while also being blamed in part for the mushrooming debt that UK consumers are drowning in.

“The rise of ‘buy now, pay later’ retailing is of great concern, as more people are being enticed into high-cost debt that they may struggle to repay,” said Ros Altmann, the campaigner and former pensions minister. “Financial resilience across the population is weakening, debt levels are rising and if too many customers are unable to repay their debts in future, we could see a repeat of the financial crisis.”

Where did they come from?

Previously known as shop credit or interest-free deals, this type of credit has been around for years, giving interest-free periods during which consumers could repay loans, but charging interest after that period. The idea was to make big-ticket items affordable. While most people would think they could pay off the money in the interest-free period, life frequently got in the way and they ended up paying interest.

Now the loans are back, and they’re far more widespread, both in stores and online. But they are rarely marketed under the buy now, pay later banner; consumers are more likely to be told that they can make “lifestyle” choices and remain in control of how they pay.

“They’re high-interest loans in drag. Don’t be fooled. Many loans don’t even mention that they’re a form of credit. It’s ‘different ways to pay’,” said Martyn James from complaints website Resolver. In October, Marks & Spencer was the latest retailer to announce a buy now, pay later service on its website to attract customers and boost pre-Christmas trade.

How does it work now?

Previously, people would have many months or even years to pay back their loan. In some cases now, that can be 30 days and for much smaller amounts. So if someone takes out a series of little loans they can quickly lose track of how much they owe and when they have to repay it, risk running up interest payments.

The Financial Conduct Authority (FCA) announced new rules earlier this year to deal with one of the most controversial elements of the credit – charging interest on the whole sum, which meant consumers could pay interest on the full amount borrowed even if they had paid off part of it. This meant that if there was £200 left on a deal where £1,000 of goods were bought with a 40% rate, the person did not pay £80 interest but £400. The new FCA rules mean firms can no longer charge on the whole amount borrowed, only the parts outstanding.

The pitfalls

Problems start are when people take out multiple loans and get confused about what to pay when. It is also, says James, easy to “sleepwalk” into these types of credit as they don’t feel like loans. This is especially the case online where a box can be ticked to say that terms have been read. The advance of technology has meant that consumers can be approved for loans much quicker than before, which results in them being able to get credit while they are in store.

“In the weeks before Christmas, [using buy now, pay later] can be very seductive. But it stops feeling like ‘real money’, and you have to be very disciplined not to spend more than you really wanted to. It can be too easy to accumulate an amount of debt you can’t pay in the few weeks and months allowed before interest is added,” said Sara Williams of Debt Camel, a blog advising on money problems.

A trap for the young

Because of the speed with which this kind of credit has spread, concern has been raised at how younger generations are being affected, especially as many of the retailers selling “fast fashion” now offer credit options. Some shoppers have found themselves in debt as a result of not returning goods on time.

Eileen Adamson, founder of financial coaching site Your Money Sorted, says it promotes poor financial decision making, which can lead on to problems in later life.

“Many of these transactions are for relatively small amounts, meaning that we don’t give them much thought, before purchasing. Imagine delaying payment for five purchases of £30, leaving you owing £150. These small purchases are easy to ‘forget’ and each time you look at your bank account, you could think you are £150 better off than you actually are,” she said.

“This can then lead to spending more money, because you feel flush. If this pattern is repeated regularly, then before long you will find yourself being unable to afford the repayments. It’s just too easy to spend more than you can afford, especially when the companies actively encourage you to buy multiple items, and return them if they don’t suit. We all know that this is just another way of encouraging us to buy more, and thereby increase their profits.”

A worsening problem

Last week it emerged that UK household debt levels had risen again. Non-mortgage debt jumped by 11%, meaning that the average household owes £9,400. One of the reasons for the rising debt problem was that people were being offered easy but expensive credit, Altmann said.

“I would like to see regulators insisting on cooling-off periods and checks before customers are allowed to take on debts. The risk of another economic crisis, caused by irresponsible lending, is rising and regulators should take this seriously.”

Ever-expanding credit

The website Resolver has received almost 7,500 complaints about “buy now, pay later”-style deals in the past year. In one case, a woman from Scotland had opened an account with one of the major retailers and was offered ever-expanding credit limits.

However, she became confused and did not grasp when she had to pay for the items she had bought, and her bill soon stood at more than £2,000 even though she did not have a job and was struggling to make payments. With late-payment fees and interest, the amount she owed was soon much more than she had spent.