'Buy now pay later' deals rising

The amount of credit for "buy now, pay later" deals has risen during the economic downturn, according to industry figures. In-store credit, often for items such as settees and electrical goods, was up 24% in March compared with the same month a year earlier. The figures from the Finance and Leasing Association (FLA) show that the availability of loans remains tight.

One charity said there was a debt risk for people in socially deprived areas. Chris Tapp, of Credit Action, said that the final cost of a hire purchase deal was often much higher than buying a product outright.

The FLA said that £5.1bn was lent by its members in the UK - such as credit card and motor finance providers - in total in March, down 12% on the same month a year earlier. With the wholesale lending markets still squeezed, loans, typically secured on borrowers' homes, fell by 76% over the same period. However, in-store credit deals leapt by 24%. These deals allow shoppers to put down relatively small or no money upfront while taking their new television or sound system home. They pay off the lump sum with interest in instalments over subsequent months.

"With a depressed housing market, many people are choosing to improve their homes and replace furnishings rather than move house," said Geraldine Kikelly, head of research at the FLA. "Retailers and lenders have been offering attractive interest-free credit and deferred payment deals on store instalment credit. "We have seen a similar trend in recent months in the motor market. The proportion of car sales represented by instalment-type credit available in the dealerships has grown from 48% to 54% over the last year. This is mainly a response to competitive pricing and reduced availability of other sources of credit."

The risk for borrowers is that if they fail to keep up with payments, the provider of the credit can take the product back. This would mean they would have been paying for something they no longer had.

The FLA said that the relatively small cost of items such as sofas meant that the default risks were lower than for bigger loans, even during a downturn. But Mr Tapp said that those in socially-deprived areas could still be hamstrung by the regular payments. "It is no surprise that this is an area which is growing during the credit crunch, but it can be more costly in the long run," he said. The FLA figures showed that unsecured loans dipped by more than a third year-on-year in March, and credit card lending also fell slightly.

Debt charities advise people in financial trouble to prioritise their repayments, paying utility bills and council tax bills first. Hire-purchase payments are slightly lower on the list, but are higher than credit card repayments. However, anyone fearing they might miss payments should contact their lender to come to an agreement.