Payday loan firms offering Buy Now pay Later retail Finance

Something that caught my eye this week was the news that Wonga have entered the market offering short term instalment plans for people buying goods online. It has generated some words of caution already;

In response to the news that Wonga has launched a new buy-now-pay-later service via retailers' websites, Michael Ossei, personal finance expert at uSwitch.com, said: "Short-term lending at rates of 7% may seem like a great way to ease the burden of a purchase, but there are cheaper ways to fund your shopping.  "As well as the overall cost of using Wonga's new service being relatively uncompetitive compared to some credit card deals on the market, there is a bigger cause for concern - what happens if consumers can't pay off their bills in time? "Unfortunately, there have been a number of worrying incidents in the past where vulnerable customers have been subject to heavy-handed debt chasing practices. The worry is that this could become more widespread as Wonga expands its offering and becomes more readily available, especially if customers aren't fully aware that it's Wonga they are borrowing from in the first place. "Although some retailers might believe the service helps their customers, by giving them another way to help pay for things, it could lead to confusion if Wonga's terms and conditions aren't clearly stated upfront. Consumers need to make sure they know exactly what they're signing up to. There is a real risk of mis-selling and unless retailers are careful, they could end up attracting the attention of the Office of Fair Trading." Source

 There may indeed be cheaper ways to pay for your goods online, straight from your bank (assuming you are not using an overdraft generating interest charges) is best. However I think the point is being missed here. There are always cheaper ways to pay for things, insure things, borrow for things but that assumes that everybody has the same credit profile, is the same age or share the same general demographic as the rest of the population.

I am not championing Wonga though I suspect if it was AN Other bank or credit provider and not the high profile Payday loan providing guest star of Watchdog there would be little of no fuss. I am merely saying that a lot of people like the convenience of instalment based payment schemes that soften the blow of paying for goods and services and give them the comfort of knowing that the balance will be settled within a pre-determined timescale. How many people for example use catalogues for example? The typical APR here is usually circa 30% on longer credit terms and although interest free terms are offered over 20 - 52 weeks the cost of the products more than allows for this service. 

Take the iPod Touch - available to buy from one popular catalogue for £219 with interest free terms of up to 12 months. Sounds good? Not when you consider you can buy the same iPod for £150 elsewhere which even if you allow for a chargeable APR of 30% you are still far better off buying it this way than putting it on your catalogue account. The catalogue however offers payment terms of 12 months and this it what appeals to people, being able to pay £4 or so a week. The equivalent APR when comparing the cost of buying the iPod online and paying catalogue terms is actually around 100%

People need to read the terms of any credit agreement and I wouldn't suggest anything else in this case either but I do think that people need to take a broader view. The new Wonga product is is merely a niche lending product that will suit some and not others, if you fear you won't be able to afford it then seriously consider why you are looking to borrow it in the first place. These are the same guidelines for any personal loan or finance scheme.