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Interest Free Credit and Buy now Pay later (BNPL)
Interest Free Credit and Buy now Pay later (BNPL)
Interest free and Buy now pay later (BNPL) schemes are forms of consumer credit commonly used in the glazing industry. Consumer credit is back in the news, this time about how car finance agreements were structured. The regulatory scrutiny they face, is based upon commissions paid that varied depending upon the interest rates paid by the consumer. This has recently culminated in more financial compensation schemes.
The next finance scandal?
We believe that the next form of credit to face deeper scrutiny from the Financial Conduct Authority (FCA) will be interest free credit or BNPL schemes.
1. Why Interest-Free Credit is Marketed Like It Is
Interest-free credit, often 0% APR, is marketed primarily as a powerful incentive for consumers to spend because it presents an opportunity to “borrow for free” or “spread the cost” without an additional charge. Key marketing appeals include:
- Affordability: It allows consumers to purchase high-value items (e.g., furniture, windows, doors) that they might not be able to afford outright, by breaking the cost into smaller, manageable monthly payments.
- Perceived Value: It suggests the consumer is getting a “better deal” or a benefit, which can drive sales volumes for retailers and lenders.
- Competitive Edge: Retailers or lenders use it to stand out in a crowded market and encourage customers to choose their product or service over a competitor’s.
2. Who Pays the Interest?
In a truly interest-free arrangement, the consumer does not pay interest as long as they adhere strictly to the terms (e.g., making all minimum payments on time and paying off the balance before the promotional period ends).
However, the “cost” of the credit is usually absorbed or recovered in other ways:
- The Retailer/Seller: In many retail settings (e.g., buying a windows on 0% finance), the retailer often pays a subsidy or a fee to the finance company to cover the cost of providing the interest-free period. This fee compensates the lender for the money they are lending without charging interest. The retailer may then absorb this cost, or more commonly, build it into the higher base price of the goods for all customers, whether they take the finance or not.
- The Consumer (Post-Promotion): This is a key financial risk. If the consumer fails to clear the balance before the 0% period ends (as is common with 0% credit cards or “Buy Now, Pay Later” schemes), the interest rate often reverts to a high standard Annual Percentage Rate (APR), at which point the consumer pays the interest on the remaining balance.
- Fees: For 0% balance transfer credit cards, the consumer typically pays a one-off balance transfer fee (e.g., 3-5% of the transferred balance), which is a form of up-front cost to the lender.
3. Why It May Prove a Timebomb
The Financial Conduct Authority (FCA), the successor to the FSA, and other regulators have concerns because these deals can become a “timebomb” for consumers who struggle to manage them.
- Reversion Rates: The sharp jump to a high interest rate once the 0% period ends can trap consumers in debt that quickly becomes more expensive, especially if they have overspent during the promotional period.
- Loss of Promotional Rate: Missing a single minimum payment or exceeding the credit limit can often result in the immediate cancellation of the 0% rate, leading to the high standard APR being applied to the entire outstanding balance immediately.
- Indebtedness: The ease of obtaining 0% credit can encourage over-borrowing, leading to significant debt when the introductory periods expire.
- Prices charged: To absorb the price of the credit agreement has the supplier increased their margins.
4. Repayment for the Scandal of Selling Something Charged More For
This concern is strongly linked to commission models in some finance sectors, which has led to significant regulatory action and consumer compensation schemes.
The underlying principle of interest free credit—where the product is sold at a higher price to finance customers because of a hidden commission/fee model—is central to the recent UK Car Finance Mis-Selling Scandal investigation by the FCA.
- The Scandal: In the motor finance sector (primarily involving Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements taken out between 2007 and 2021), the FCA found that many lenders and brokers (dealers) used Discretionary Commission Arrangements (DCAs). This allowed the broker/dealer to set the interest rate for the customer, and the higher the rate they set, the more commission they earned from the lender.
- The Problem: The customer believed they were getting the best available rate, but they were often unknowingly charged a higher interest rate than necessary, solely to maximise the dealer’s commission. The customer paid more for the same product based on a hidden incentive.
- Regulatory Action & Repayment: The FCA banned DCAs in 2021 and has since been working on an industry-wide compensation scheme to force finance companies to repay customers who were charged more due to these undisclosed, unfair commission arrangements. Finance companies are indeed being made to repay or compensate consumers, similar to the Payment Protection Insurance (PPI) scandal, to redress the financial loss caused by the unfair commission structures.
In Conclusion
KJM have been installing windows and doors for over 40 years. The company run by Managing Director Mark Pearce has an entirely ethical pricing policy. Whilst they would love to entice customers with Interest Free or BNPL agreements, it would always have to be argued that if a company is able to fund one of these schemes through their margins then there would always be the possibility that you could reduce the cost if another form of payment was made, other than finance.
This of course would be totally illegal as the credit could no longer be described as interest free. You decide? There is further information on this blog post.
KJM Group operates on an entirely ethical pricing policy and believes that if a company is able to fund an “interest-free” scheme through its margins, the cost is likely built into a higher initial product price. This means the credit is not truly “interest free” and can be misleading to the consumer, which is against KJM’s “no-pressure promise” approach.
The primary risk is the high “reversion rate.” If the consumer fails to clear the balance before the 0% promotional period ends, the interest rate often reverts to a high standard Annual Percentage Rate (APR). This can quickly trap consumers in debt that is far more expensive than they initially anticipated.
The article draws a strong parallel with the car finance scandal, where dealers maximized commission by charging customers higher interest rates. KJM argues that if a window supplier increases their margins to absorb the cost of a “free credit” agreement, the principle is similar: the customer pays more for the same product due to a hidden cost, making the credit offer less transparent and potentially the subject of future regulatory scrutiny.
KJM Group’s policy is based on ethical conduct and their “no-pressure promise.” Their sales team is salaried (not commission-based), and they rarely price products in the home, instead providing a full written quotation for the prospective customer to review at their leisure.
Mark Pearce is a highly experienced specialist in the double glazing industry, having built his knowledge from the ground up through hands-on experience in installation, manufacturing, sales, and business management. Beyond his role at KJM, Mark is a keen blogger, writer, and traveller, often sharing insights on the latest innovations in the home improvement industry.
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