Topic Consumer protection Buy now, pay later - how does it work and what do I need to know?
It has never been easier to order things and, in some cases, not pay for them until long after delivery. The online retail check-out process allows consumers to conclude partial or instalment payments, deferral agreements and other credit-based forms of payment with just a few clicks. In particular, payment service providers specialising in alternative payment methods normally enable this for minor amounts as well. They offer a variety of different credit-based payment methods, often allowing customers to change their payment method even after an order has been completed and delivered.. Such models are increasingly finding their way into physical retail as well. From the consumers’ point of view, this new flexibility has a few pitfalls. For instance, not only are the offered terms often more expensive than other consumer financing options, but low instalment rates or due dates in the seemingly distant future can also tempt consumers to act hastily. Particularly if you are already short of cash, you may run the risk of accumulating debt that you may simply be unable to repay.
What should consumers know about credit-based payment methods in retail?
For online retailers, credit-based payment methods are a means of sales promotion. For consumers they are a supposedly easy way of buying on credit.
Legal classification depends in each case on the specific content of the agreement. Such agreements are structured as loans, instalment purchases, deferral agreements and other forms of financing assistance for a fee or free of charge (e.g. “zero percent financing”).
Credit-based payment methods are frequently accompanied by conclusion of a credit card agreement or a line of credit with special terms for future purchases.
Do consumer protection rules apply?
Special consumer protection rules generally apply to credit-based payment methods. In particular, the creditworthiness of the person using the payment method must be checked. If instalment payments have been agreed, financing can only be cancelled in case of “substantial” arrears on instalments, and only after notice has been given.
A variety of payment service providers operating in the German market offer credit-based payment forms from other EU countries. The aforementioned protection provisions apply in such cases too. The legislation covering loan agreements does not provide for any special consumer protection for amounts under EUR 200 or if the loan or the cash price is (re)payable in full within three months.
A mandatory creditworthiness assessment, in particular, does not apply in such cases. What may sound like an advantage is, in fact, a disadvantage: it is solely up to the consumer to judge whether they can afford a purchase or not, and this can be problematic because people usually choose such credit-based payment methods when money is already tight. What is more, if there is no obligation to perform a credit check, there can be no sanctions for a violation of such an obligation – sanctions designed to protect the consumer against high interest charges and excessive debt.
What you should be aware of
- Live within your means
You should keep an eye on your bank balance, as well as your monthly fixed costs and other regular expenses. This will help you understand what amounts you will have available to pay off your purchases, and when. - Make comparisons
You should compare different financing offers as well as the cash price for goods, as you could save costs by doing so. If possible, compare the annual percentage rate (APR) that all providers are required to calculate by the same formula, and the financing term. APR can vary by more than 10 percentage points. If you want to finance EUR 100 at checkout in a retail store or an online shop, assuming a term of 12 months depending on the payment provider, you could expect a total amount payable of around EUR 105 or EUR 112. The APR underlying these sample calculations is either just under 10% or over 23%. Many credit institutions offer consumer loans at terms that are often considerably less expensive than payment options offered by retail stores or online shops. - Always consider the total amount
Do not be deceived by low instalments. Instead, consider the total amount that you will have to pay in the end (cash price of the item plus financing and other costs). The important thing is to regularly check the state of your finances, taking into account all outstanding instalments – including those from any other consumer loans. - Make payments when they are due
Default interest, reminder fees and collection costs can be high. Try to avoid these by making payments on time. Jotting down income, expenses and due dates in a budget planner may be useful. Free budget planner templates are available on consumer centre websites, among other places. - Be careful of additional products
Be cautious when the credit-based payment methods offered include financing options that go beyond your current needs, such as a credit card. Thoroughly familiarise yourself with the terms of use, interest rates and costs before signing up and keep the above tips in mind for future purchases.
