Wonga, the short term loan company that has been strongly criticised in the past for its representative APR of 4,214%, has teamed up with the Cotswold Company to launch a new ‘Buy now pay later’ scheme. This is aimed at providing consumers with an alternative purchase method to the traditional credit card.
So, is this a revolutionary purchase method that provides customers with a valid alternative to the credit card when making higher value purchases online? Or is it simply another way for short term loan companies such as Wonga to take advantage of consumers during a time when most households are faced with increasing outgoings and less spending power?
According to a Wonga spokesperson, ‘this is just another means of payment for online retail transactions’. They added that ‘the benefits are its transparency and its convenience’ and that ‘it’s very clear about what you’ve got to pay over three months’.
The scheme works by charging customers an upfront fee of 7% followed by three monthly payments to cover the cost of the purchase. This sounds great when you first read it but it isn’t necessarily the best deal for customers.
For example, for an old style country kitchen cabinet costing £575, you would be charged a fee of £40.25 followed by the original purchase price over a 3 month period. Whilst this is only a 7% transaction fee it equates to a Representative APR of 28.3%.
If purchased on a standard credit card, the APR would be more in the region of 19%, so the interest payment would be much less than with the Wonga scheme.
Big, Bad Wonga, or Customer Champion?
- The pay later scheme allows consumers to spread the cost of high-worth purchases using an up-front and transparent method
- It provides consumers who don’t have a credit card an alternative that’s considerably cheaper than most short term loans
- It allows retailers to provide an additional purchase method on their site to try and encourage conversion
- If a customer cancels within the 14 day cancellation period they will receive a full refund for the 7% fee paid
- The Representative APR is higher than the average credit card
- There is only the 3 month payment option available to consumers, so it may be unsuitable for many shoppers
- There may be extra costs incurred if later payments are not made
It will be interesting to see if more retailers sign up to this in the coming months, and if there is actual demand by the consumer. The Cotswold Company isn’t reporting a high take-up at the moment, so it may be that the demand simply isn’t there.
As to whether or not this will be a genuine alternative to using credit cards for online purchases, we’ll just have to watch this space…