Payment Plans

Over the past twelve months or so I have been noticing a different type of payment trend that has become available and gaining popularity when paying for goods and services on-line.

Klarna and PayPal offer a way to pay for items in smaller amounts, typically the most common options are being able to divide the purchase cost into three payments over a specified amount on time.

Large high street retailers seem to be backing this new payment method giving shoppers in-store convenient ways to spread the cost.

This payment trend has been moving into services and intangible products such as tickets for events.

I have heard comparisons being made to this type of payment option loosely as a subscription.

Over the years in my professional life I have seen software moving rapidly from single time purchase to monthly or annual recurring payment methods, a traditional subscription model.
 
Everything we consume now is costing more, it is not just food and energy, it has now worked it’s way to into absolutely every outgoing we have. Products and services we once purchased as whole are being broken down into smaller amounts to ease the cost burden.

Having new payment options like this is a way for retailers, goods and service providers to help their customers to be able to afford the things they need and want.
 
Payment plans much like subscriptions services are generally interest free, especially if you pay within the agreed time frames.

The difference with subscriptions is that you can cancel at any time. You may lose the the service or product you are paying for but that’s it.

A payment plan is different.
 
As much as great as it sounds to state that payment plans are like subscriptions they are actually short term loans and similar to a credit or store card.
 
Once you have committed to the agreement in a payment plan you are bound by the terms set out in that credit agreement. I scanned the the terms and conditions of two providers, Klarna and PayPal. I gleamed the following information.
 
Eligibility.

You have to be over 18 years old and have a valid form of payment.
 
Credit score.

Initial “soft searches” are completed to see if you are eligible for credit. This does not impact your credit score and will only be visible by you on your credit file.

If successful and you begin a payment plan you will be able to see the credit agreement and the payments you have made on your credit file.
 
Transfer of rights.

You cannot transfer the credit agreement to another provider without the current provider’s permission first.

However the provider can transfer your terms of your debt to another provider at any time and don’t have to notify you.
 
Late payment fees or missing payments.

If you fail to pay after a certain amount of time (out of the agreed time frame) then late fees will apply. Typical fees for Klarna are around 20-25% depending on the amount of credit you have.

PayPal do not mention any late payment fees.
 
Failure to pay.

If you fail to pay after the agreed time then the provider will be within their rights start legal action against you and to contact an FCA regulated debt collection agency to recover the outstanding amount.

The credit reference agencies will be notified of the payments you have made along with any payments you have failed to make. This will affect your credit score and therefore could possibly affect you ability to get credit in the future.

Specifically Klarna would pass your over to a debt collection agency.

PayPal mention missing payments could have “severe consequences”.
 
If you want to clarify any of the information please make sure you read the terms and conditions of both providers for yourself to determine the risks involved. I have literally scanned the information to pick out the key aspects that make payment plans different to subscriptions.
 
Both providers are perfectly entitled to ensure they receive payment for the money they have lent, but the marketing surrounding these options is slightly worrying.
 
Interest free “pay in 3” propositions are extremely enticing, mainly because the term is short and the monetary value may not be be huge. It enables us to get the goods and services we want straight away.

It has to be mentioned that any type of loan, no matter how small is a form of debt.

Debt should be avoided at all costs and only taken for goods and services that have been fully considered.

Personally I consider a mortgage or vehicle loan to be sensible. I will tack a thousand asterisks to that statement as financial products vary wildly depending on your credit status, but the point I want to make is that a mortgage can provide a roof over your head and a vehicle can directly affect your employment and or business opportunities.
 
I’m not comfortable with debt being racked up for a music festival, just like I’m not comfortable with a store card or credit card.

I have just learnt from experience that debt makes life so much harder and sometimes we should go without and save for the things we want.

If you aren’t able to pay for certain types of goods and services as a whole then it might not be the right time to purchase.
 
The more credit we take for these types of purchases then the easier it is for companies to increase the price. As well intentioned as it might seem I believe that companies like Klarna and PayPal are not doing us a favour by offer payment plans, they are businesses with the sole purpose of making profit. Having customers owing them money provides them with a captured market.