If you buy now, don’t pay the penalty later on - Sarah Coles

The good news is that there’s every chance you’ve already started your Christmas shopping, and saved yourself a December of festive panic, because more of us than ever are shopping early this year.

Sarah Coles is a personal finance analyst at Hargreaves Lansdown
Sarah Coles is a personal finance analyst at Hargreaves Lansdown

The bad news is that there’s every chance you’ve only just started paying for it, because an alarming number of shoppers are planning a buy-now-pay-later Christmas.

Citizens Advice estimates that one in ten of us will use buy now pay later services this Christmas, and an estimated 17 million people are already doing so. Figures from one of the biggest players, Klarna, this week showed that sales using its services were up 48 per cent during Black Friday week and 53 per cent on Cyber Monday.

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On the face of it, this feels like a sensible development. If you need to borrow to cover the cost of Christmas, then as long as you make all your payments on time, these services allow you to spread the cost without paying interest. It means they could be cheaper than any other kind of borrowing. However, there are five key risks that mean it can be far riskier than you think.

The whole point of retailers signing up to these services is that they know it persuades us to spend money that we wouldn’t consider spending otherwise. The FCA looked into the sector last year and said it increased sales by around 30 per cent. This is partly because when payments are made in instalments, people focus on the size of the first one rather than the overall cost.

There’s also a concern that people can stumble into this borrowing without giving it serious consideration. Purchases using these services are usually for relatively small sums of money: the average amount borrowed is between £65 and £75, so people don’t consider their overall borrowing when they take a new debt on.

The basic credit assessments associated with this kind of borrowing means the lenders don’t view it in the round either, so it’s easier for people to borrow more than they can afford. In some cases, this is on top of other debts. One bank told the FCA that 10 per cent of their customers who used buy now pay later also used their overdraft in the same month.

To make matters worse, because they’re sometimes positioned as a default option on websites, the FCA found that in many cases people don’t even realise they’re taking on debts. People who would be worried about racking up a credit card bill on fast fashion or food, are relaxed about using buy now pay later for them

Finally, while paying on time means you may not have to pay any interest, you need to know the price you’ll pay if you miss payments. There may be fees immediately, and these can rise over time. If you really struggle to pay, your debt could even be passed onto a debt recovery firm, which will ramp up your costs even more.

The FCA plans to start regulating the sector next year, but that leaves people vulnerable over Christmas. If you’re going to use these services, you need to appreciate the full cost of what you’re spending. Keep detailed records of everything you’re borrowing, and what it will cost to repay. Don’t take on debts you can’t afford to pay back, and make sure you understand the price you’ll pay if you miss any payments.

This doesn’t mean that buy now pay later is the villain of the piece. In fact, if you borrow using more traditional methods, it could cost you even more. Research we did last year found that one in four people put at least some of their Christmas spending on a credit card.

And while they might have planned to pay it all off within a month to avoid paying any interest, almost one in ten people aged 35-54 said it would take six months or longer to repay their Christmas card debts. The costs involved can be horrible. If you borrow £1,000 on a credit card at 22 per cent and pay it back over six months, it can cost you £53. If it takes you a year it could cost £103.

Even more expensively, more than one in 20 people said they’d use their overdraft to pay for Christmas, which starts costing a small fortune from day one. A typical overdraft rate is now a shade under 40 per cent, so you’ll pay handsomely for dipping into the red.

At this stage in the Christmas shopping spectacular, there’s a good chance you’ve either overspent, or you know you’re going to, and feel powerless to do anything about it. If you do decide to borrow to meet the shortfall, consider the costs carefully and take the time to track down the most sensible option for you. The further ahead you can plan your borrowing, the lower the interest rate you’re likely to be able to get. There’s no need to end up in your overdraft. Before you borrow a penny, you also need a foolproof plan for getting back to zero as soon as possible in the New Year, to keep the costs under control.

There is another option though, because there are always some costs you can cut. This includes everything from ditching a few of the festive extras to running a secret Santa so you all only buy for one person, or agreeing just to buy for the kids this year. After everything we’ve been through over the past year and a half, people will understand if your finances have taken a bit of a beating.

At Christmas we somehow feel we’ve failed people if we don’t buy everyone their must-have gift, but if we explain the situation, and give them something with love, they’ll understand. Failing that, you could always put off seeing them until you’ve been paid in the New Year, and buy them something in the sales.

Life has never been harder for first time buyers

New figures from Nationwide this week reveal that first time buyers are finding it harder than ever to raise a deposit on their first home.

Building a 20 per cent deposit on the average home means saving 110 per cent of average income. Meanwhile, the first-time-buyer price-to-earnings ratio hit a new high of 5.5. The previous high was just before the financial crisis in 2008, and the long-run average is 3.8.

The good news for Yorkshire buyers is that affordability is far better than elsewhere in the UK - particularly the South. In Yorkshire and the Humber, the price-to-earnings ratio is closer to 4 – the second lowest in the UK after the Northern region at 3.5.

It means buyers are able to save for a deposit more quickly than elsewhere. The study assumed people would save 15 per cent of their earnings and buy an average property with a 20 per cent deposit. They found that in London it would take just under 16 years, while in Yorkshire and the Humber it takes around seven years.

So while life is harder than ever for first time buyers in general, life is better in Yorkshire.

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Spending traps and saving tips for Christmas shoppers - Sarah Coles