The UK has been dealing with the energy crisis for a few months now and it does not seem that the situation will improve anytime soon. On the contrary, energy prices keep going up, making energy customers pay more for their energy supply.
The government introduced certain aid programmes to help people cover the rising costs of energy but the solutions it proposed are not enough. More and more families are facing fuel poverty, which is a situation where a big proportion of a family’s budget is spent on the energy supply. Now, increasing numbers of people around the country struggle to pay for basic necessities such as food or medicine after settling their energy bills.
Not knowing how to deal with the situation, some are turning to desperate measures such as ‘buy now pay later’ loans. Here we take a look at what these loans are and we analyse the disadvantages that come with them.
What are ‘buy now pay later loans’?
‘Buy now pay later’ loans are also referred to as BNPLs. They allow people to make a purchase, receive it immediately, and pay for it at a later date. Payments are usually made in instalments. BNPL payments come with interest rates and late fees for those who fail to make a payment in time. There are many providers that offer them so exact rates and fees vary.
This type of loan is not a new invention but as people are struggling to cover the rising costs of getting their energy supplies, they are growing in popularity in the UK and around the world.
As ZDNet reported, ‘BNPL is projected to be the world’s fastest-growing payment method both online and in-store between 2021 and 2025, according to Worldpay’s 2022 Global Payments report. By 2025, BNPL is expected to account for 5.3% of global transaction value, or approximately $438 billion.’
When it comes to energy bills, BNPLs allow people to spread the costs and pay for their bill not at once but over a certain period of time.
Why you should avoid ‘buy now pay later loans’
Some people think BNPLs are a great option because it allows them to pay a number of smaller sums rather than one big bill all at once. Nevertheless, BNPL can easily turn into a big debt that can be difficult to repay. After all, in between the instalments, you still have other expenses and you keep using the energy that you will be billed for next month. Hence, getting a BNPL might lead to you having troubles giving back all the money you own in the future.
Moreover, BNPLs come with interest rates so you will actually end up spending more money than if you paid your energy bill using just one payment. Similarly, if your payment is missed or late, you might have to pay additional fees.
And, sometimes when people are tempted by using the services of BNPL providers that offer lower interest rates, they find themselves stuck with a deal that lacks transparency. Then, there might also be hidden fees that they have to pay.
So, what should you do if you are struggling to pay your energy bill all at once? ‘debt and energy advice groups warned that consumers were better off approaching their energy supplier to negotiate repayments,’ Financial Times reports.
Your energy supplier is aware of the situation on the energy market and they can help you find a solution and make it easier for you to pay your energy bills.
The energy price cap might rise by another £900
In recent months, the energy price cap in the UK rose by 54%, taking the average household energy bill to £1,971 a year. Keith Anderson, the chief executive of ScottishPower, warns that there could be another increase, as high as additional £900 this winter. If that happened, this amount would increase to £2,900.
In a conversation with Sky News he said, ‘We need to act and we need to act quickly, because that will create huge amounts of pain and difficulty for a whole load of families across the whole of the UK.’
The solution he suggests is for families to receive £1,000 as an assistance in dealing with rising energy bills. But will the price cap definitely rise? And is implementing the new scheme feasible?
Future energy price cap increases
The energy price cap represents the maximum amount your supplier can charge you for your energy if your consumption is average. So, it does not mean that you will never pay more than that. If you consume more than an average user, you will be billed more. The energy price cap applies only to ‘customers who are on a standard variable tariff (SVT), which is usually a provider’s most expensive tariff. If you switched to a fixed deal over a year ago and that has come to an end, you will be moved to the standard tariff or “default tariff.” If you have not switched at all, you will remain on the SVT,’ Money Supermarket explains.
The energy price cap is set by Ofgem to prevent suppliers from overcharging energy customers for each unit of electricity and gas they use. If needed, changes to the energy price cap are implemented twice a year, in April and in October.
The recent 54% increase was triggered by the rise in wholesale costs of energy. And, as the energy crisis is still worsening and prices are still going up, it is likely that Ofgem will have to review the cap and raise it again.
Keith Anderson’s prognosis is not the only one assuming a significant rise in October.
‘The estimated price cap will go up to £2,600 in October 2022 for the average dual fuel bill. This is a predicted increase of over £600 from the current cap of £1,971, and would mean that energy prices would have doubled in just one year,’ Cornwall Insight writes.
Urgent action needed
There already are many families that struggle to pay their energy bills. Another increase of the energy price cap will push even more people into poverty, making it difficult for them to pay for their gas and electricity, as well as other basic goods.
Currently, households can receive £200 towards their energy bills, an amount that they do not have to repay. Unfortunately, if the energy price cap goes up again, this contribution will not be enough.
‘Mr Anderson said his proposed £1,000 discount could be paid back by all households through their energy bills over the next decade – or recovered through taxes, SkyNews reported.
The scheme that Keith Anderson suggested would be of great use to the most vulnerable but for it to be ready in October, it is necessary to agree on it in July. This is why it is important that policymakers start discussing the details and working on the proposal as soon as possible. The government, Ofgem, and various actors operating in the energy industry have to all work together to help customers survive the energy crisis and maintain good quality of life.