It’s the time of year when wallet restrictions are loosened for the holiday season.
Most of us are at the stage where we have at least started planning the months ahead and, more importantly, how we will finance and manage our annual Christmas spending.
After at least two years of fairly sharp price increases, and unless commensurate wage increases are given, many more of us are likely to feel the pinch more than ever this year.
Some will look to take out a loan or other arrangement to help them get through this expensive time of year, while others will take advantage of the increasingly popular ‘buy now, pay later’ financing methods.
The central bank has issued guidelines on the expanding payment method, warning consumers to be mindful of the terms and conditions associated with such deals.
What is this?
Perhaps a more modern form of what was formerly known as “in-store credit”, buy now pay later (BNPL) is a credit arrangement that allows a consumer to purchase goods or services and spread the cost over a period of time. Time, usually months.
Traditionally, this type of credit could be used to buy relatively ‘large value’ items such as furniture or televisions, but it is increasingly being offered as a way to pay for items such as clothing and smaller electronic items, for example.
The BNPL provider is usually not the store where the item is purchased. This arrangement usually involves the customer entering into a separate contract with the credit provider.
The 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 an administrative fee, as well as fees for late or missed payments.
Mis-understanding
The Central Bank conducted research on BNPL which revealed a fairly low level of awareness among consumers of the risks associated with credit arrangements.
Just over a third did not understand that this was a form of credit rather than an actual payment.
About one in five admitted to not having a full understanding of how BNPL works, which – as the central bank warns – could inadvertently lead to an inability to pay.
Gerry Cross, director of policy and risk at the central bank, warned: “Before you buy, make sure your budget exceeds the initial payment, as missed payments could result in a financial cost and have an impact on your future credit profile.”
“And if you find that you are relying on short-term credit to pay for things that you could have budgeted for previously, this could be a warning sign of potential financial difficulty,” he added.
In fact, nearly half of those surveyed in the central bank study said that the availability of BNPL led them to spend much more than they had planned.
High costs
Although in many cases BNPL arrangements do not attract interest payments, some versions do.
Normally, there may be an interest-free period during which repayments can be made without incurring costs, but after this time frame, an interest rate is applied to the amount owed.
According to the Financial and Budget Advice Service (MABS), typical interest rates range between 3.99% and 39.9% APR (annual percentage rate), although the central bank introduced a 23% interest rate cap last year for regulated providers.
“It is important to realize that interest rates are variable and the amount of interest you are charged can change daily,” MABS noted.
In more traditional financing arrangements, a formal repayment plan is agreed with an interest rate attached, which must be communicated to the borrower at the point of purchase.
In most cases when it comes to financing a BNPL company, late fees and penalties apply which can be reflected in credit reports, which may affect the ability to borrow in the future.
Systems
In May last year, the central bank issued regulations requiring BNPL service providers to obtain a license from the central bank, thus extending consumer protection measures to those who avail of these services.
The legislation also included a measure to limit the maximum interest rate charged on such financing arrangements to 23%.
It is also the responsibility of companies to act responsibly and ensure that the terms and conditions of their products are clear and transparent to customers.
“Consumers should be clearly informed 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 realize what they are signing up for, “buy now, pay later” has its place and can provide benefits.
It can provide a way for consumers to secure an item now and pay for it when they get their next paycheck, rather than risking a delay only for the item to no longer be available.
If an interest-free period is offered, the service will not cost anything once payment can be made within the specified period. In fact, it can be much cheaper than taking out a personal loan.
It can also be 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 that may ultimately result in late payments that may attract interest and late fees.
Missing payments can, in turn, affect an individual’s ability to obtain loans or other credit in the future.
Record expected spending on deals
Although the majority of consumers expect to cut back on their Christmas purchases this year, the reality is that they will likely end up spending more than they did in each of the past few years.
According to research from KPMG this week, 80% of survey respondents said they were bracing for higher gift and food costs in the run-up to the holiday season, with about 60% saying they would manage this by holding back on retail spending. Or entertainment.
“They are doing more research, actually shopping early – looking for deals, and focusing more on value for money this year,” said Keith Watt, head of retail at KPMG.
This is evidenced by separate research conducted by AIB this week which seemed to suggest that consumers will rely on discount retail days such as Black Friday and Cyber Monday for more Christmas shopping this year.
It expected online spending on Black Friday to exceed last year’s record total.
AIB research indicates that Irish consumers spent more than €95 million online on Black Friday in 2022, with a record 900,000 transactions, making it the busiest online spending day on record.
Cyber warning
Online shopping days like Black Friday and Cyber Monday are prime opportunities for scammers to make financial gains.
AIB and Bank of Ireland have both warned customers to be on the lookout for scams in the days surrounding each upcoming event, especially when it comes to deals that appear to be too good to be true.
Nicola Sadleir, head of fraud at Bank of Ireland, warned: “Fraudsters like to inject an element of urgency into their fake offers or ads, but don’t rush into a transaction without checking things properly first.”
“Check if websites and apps are legitimate and be very careful when dealing with online ads, text messages or emails,” she added.
One of the main actions that consumers are urged to look for on websites is the presence of a lock symbol and ensuring the presence of “https” in the browser address window, especially on a page containing bank card details or personal information. being entered.
AIB has warned consumers to be cautious about text messages or calls purporting to be from a bank during the coming online shopping days.
If in doubt, hang up and call the bank at the advertised number to check if the call is real, she advises.
Finally, a simple but potentially costly mistake. If you’re using a shared device, make sure you log out of the site when you’re done shopping to make sure there’s no risk of anyone else using your personal details.