Warning: Late repayment can cause you serious money problems. For help, go to www.moneyadviceservice.org.uk

Tempted by Weekly Payment Stores? Why You Should Think Twice.

Think twice about weekly payment stores.

Why Have High Street Hire Purchase Stores Have Been Under the Microscope of the FCA Recently?

The short-term credit market has had some serious shake-ups over the last year. The changes have reshaped the market to help protect customers. But has the escalating debt problem shifted to another market? The FCA is closing in on the rent-to-buy market. In particular, some of the practices surrounding additional charges service agreements. Read on for everything you need to know about buying from a high street weekly payment store.

What happened to Payday Lenders?

In January 2015, a price cap regulation was introduced to the short-term credit market. The changes were brought in to protect vulnerable customers from falling into rapidly escalating debt cycles. Some of the changes introduced included;

  • Interests and fees on loans capped at 0.8% per day of the amount borrowed.
  • Default fees are capped at £15.
  • The total cost (including fees and interest) capped at 100% of the original sum.

While responsible lenders like Ferratum welcomed the changes, 4 in 10 lenders left the market last year.

What have the regulations got to do with Weekly Payment Stores?

The new regulations changed the short-term credit market significantly. The Consumer Finance Association (CFA) recently published a report about how the industry has changed. In the period January to April 2016, the amount of loans sold on to debt recovery was 42% lower than the same period in 2013. The report also showed that short-term credit has overall become harder to access. Stricter affordability assessments have reduced the number of loans offered to higher-risk clients.

People on the lowest incomes are generally deemed to be the most vulnerable when it comes to higher-interest, short-term credit. This means that if they can’t afford repayments without struggling, then they shouldn’t be offered credit. But, the danger is that those people still want to access credit. Without short-term lenders, the only option remaining to them is to use high street rent-to-buy stores.

What’s the problem with Weekly Payment Stores?

The problem with weekly payment stores is that their credit agreements are based on extremely high costs for products. Payments are spread over long periods of time. Also, compulsory add-on costs are not immediately clear to the customer.

Take a look at this example from a popular high-street weekly payment store for a washing machine agreement over 156 weeks:

Samsung 9kg AddWash Washing Machine

Price in Normal Shop*

Price in Weekly Payment Store

Add-on 1: Mandatory Aftercare

Add-on 2:

Insurance

Total Potential Cost for Customer

£579.99

£642.76

£299.25

£255.84

£2127.84

*This reflects one example, price of the washing machine does vary from store to store

On the website, the store advertises the total cost, broken down into the compulsory elements, but fail to mention the insurance. As you must have insurance for the product, 69% of customers bought the insurance from the store. Including all add-ons, interest and other related fees, the customer ends up paying an extra £1485 for their product.

But I can afford the weekly repayments…

Now you can, but a lot can change in 156 weeks (remember, that’s 3 years!). Affordability checks amongst these lenders are poor. People with insecure incomes enter deals they may struggle to afford. Furthermore, these stores currently allow customers to take out multiple agreements. Meaning that ‘manageable’ weekly payment soon spirals out of control.

Once they fall into arrears, customers report that these companies are inflexible and unhelpful in understanding their circumstances. More than a third of customers surveyed reported that they were not able to agree to an affordable repayment plan. Half said they felt they were treated unfairly.

Customers also reported harassment and aggressive debt recovery practices. This includes constantly calling and visiting properties at inappropriate times. They use threatening tactics to get consumers to pay more than they can reasonably afford.

What should I do?

The Citizen’s Advice Bureau recently published a report on weekly repayment stores. They outlined their survey results, as well as recommendations for improving the business practices of weekly payment stores. The FCA is likely to crack down on these companies soon.

Until there are more regulations surrounding the practices of weekly repayment stores, the best advice is to avoid this kind of risky credit agreement.

It can be tempting, especially around Christmas, to take up a rent to buy agreement. Consider whether it is an essential purchase. Non-essential products, such as TVs are not worth getting into debt for.

You should consider your other options. Your local area will have options for buying second-hand appliances. Usually including some warranty for peace of mind.

If you are considering using credit for an essential purchase, always choose a responsible lender

Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk. Representative example: APR 1270% if borrowing £400 for 4 months. Interest rate: 292% p.a. (fixed). Total amount repayable: £665.48 by four instalments of £166.37. Maximum representative APR: 1604% if full loan repaid after 7 days.