Interest-free loans to pay off purchases of specific items are growing increasingly common at both online and physical stores in South Africa.
At least three local companies, LayUp, PayJustNow, and Payflex, are now competing to give shoppers an appealing take on the otherwise antiquated lay-by option. These revamped lay-by services allow shoppers to pay a deposit, in the case of at least two received goods up front, and then settle the remainder owing over the subsequent months - at no extra cost.
For shoppers, it's largely a no-catch agreement. After signing up and receiving approval, you'll simply need to pay an agreed deposit (usually in the region of 25%), and then meet your subsequent payment deadlines each month thereafter.
Unlike traditional lay-bys, the subsequent payments don't inflate the price of what you're buying, and there are no fees to pay either. Some will even release the goods with just the small deposit paid. Provided you don't breach the agreement, this essentially amounts to an interest-free loan to pay off an item, or items, from a specific retailer.
There are, obviously, a few limitations. The first being that it appears as if these new lay-by companies are working hard to lock retailers into exclusive agreements, which means limited room to pick and choose who handles your lay-by.
The buy-in from big retailers is also relatively limited - for now. Although stores such as Edgars, the Pro Shop, Cotton On, and Cape Union Mart are flirting with these options, some are limiting their integration into the online space only. This means the bulk of the retailers that local lay-by companies have signed up are all pretty random businesses and e-commerce sites that you may never have heard of.
This, it appears, is part of the business model of this new wave of lay-by companies. Their sales pitch is primarily aimed at merchants - with promises along the lines of: "convert up to 60% more customers today", "Boost sales", and "Increase average order value by up to 25%".
This is a particularly enticing option for niche stores looking to increase their online presence, and hopefully drive more sales. And in most cases, they're also not required to pay anything to the lay-by processing companies up front, or take any risks, to offer their customers interest-free payments. Instead, they take commission from the merchant on each concluded sale - typically around 5%.
The risk of this to consumers is that stores may - at some point - decide that the cost of interest-free payments should be borne by the shoppers, much like smaller independent stores that historically included a surcharge for credit card payments, or cash discounts. But for now, it appears as if this isn't happening, and most stores are happy to swallow this cost in the hope that it's offset by the improved conversion rate.
The pitch to the shoppers is an equally compelling one, but not one without fairly deep terms and conditions that will keep you in check if you don't make your payments. Although the companies claim their penalties for late payment are low, given the equally low value of the purchases they're not always amazing - in a worst-case scenario, you might find yourself owing another R375 on top of your R1,500 loan, for example.
As with normal credit accounts, you will also have to build a reputation if you want to extract real value from the service. First-time purchases are limited to one at a time of nominal amounts of around R1,000 to R1,500 - but each time you prove your ability to pay these off you'll earn the right to receive higher limits and make more simultaneous orders.
