New research shows that more Britons have borrowed through buy now, pay later services since the start of 2021 than they have borrowed traditional debt such as bank loans or mortgages.
Ten percent of adults have used a BNPL, 6 percent took out a mortgage, 3 percent took out a bank loan, and 2 percent used an authorized interest-bearing overdraft, according to research by loan provider Creditspring.
Despite their growing popularity, about a third of adults were unaware that BNPL schemes were a form of borrowing.
BNPL schemes are third-party services such as Klarna, Afterpay, and ClearPay, that appear at online checkout and give the buyer the option to split their payment into installments.
One in four adults have used a BNPL scheme in the last 15 months, as debt-based charities warn consumers about the dangers of borrowing more than you can repay
While many options offer interest-free options, interest can be charged on higher-value items or longer borrowing terms.
Fees are usually collected if the borrower makes a late payment, details of which can eventually be passed on to debt collectors.
Despite this, the Creditspring survey found that one in seven adults think it is “impossible” to get into debt with a BNPL, rising to one in four among those under 35.
Younger adults are among the most common users, with one in five having used late payment systems in the last 15 months.
These misconceptions could mean that millions of borrowers in the UK are at risk of damaging their credit reports or unintentionally falling into debt.
Debt and citizens advice charity Stepchange has warned that the cost of living crisis could increase reliance on the BNPL through 2022.
“Because of the way BNPL services are marketed at checkout, younger consumers — who tend to be less financially savvy — often don’t realize they’re taking credit at all,” said Richard Lane, director of external affairs at StepChange.
These services are provided as a convenient way to shop and do not give individuals an opportunity to stop and think about the consequences of obtaining credit and the financial difficulties that may arise later.
For someone considering BNPL, keep in mind that even though it may be interest free, it is still a borrowing, and will need to be repaid.
“It is important to realize that BNPL is like any other debt, and you should never borrow more than you can afford.”
Four out of five adults are said to be unaware that BNPL schemes are not regulated in the UK, while half were unaware that a person could be referred to a debt collector for missing a BNPL payment, according to Creditspring.
Another 43 percent said they did not know that BNPL providers could add a late payment fee.
About one in four adults under the age of 35 believe they won’t be able to get into ‘serious’ debt using the services, which Citizens Advice said is a worrying mindset.
Matthew Upton, Director of Policy at Citizens Advice, said: “Buy now, pay later Borrowing can be like quicksand – easy to slip into and very difficult to get out of.
Our real fear is that people don’t understand what they’re getting involved in, or the consequences if things go wrong. The government needs to move forward urgently in regulating the BNPL sector.
Debt charities urge customers who use BNPL to understand the risks of borrowing
According to the FCA, there were BNPL transactions worth £2.7 billion in 2020, with research suggesting the market more than doubled to £5.7 billion last year.
Last year, the government announced a consultation on regulating the BNPL industry, but this has yet to be implemented.
“Since payday loans were taken out of the mainstream, BNPL is seen as the new wild west of the borrowing industry,” said Neil Kadagathur, Co-Founder and CEO of Creditspring.
“Regulation is welcome, but misconceptions among borrowers, that BNPL is risk-free or not a form of borrowing that can lead to debt, is a much bigger problem.
Borrowers must be protected – they are currently in real danger of falling into yet another credit trap as they continue to rely on BNPL as a crutch with which to fight until payday.
More BNPL services have been used than regular lenders, including loans, mortgages and auto financing, since January 2021
“The worst case scenario is that borrowers could end up receiving a knock on the door from a debt collector, but currently the vast majority are not fully aware that this is a possible possibility.”
He also said that since it is currently easier to access a BNPL than to qualify for a credit card, people in precarious financial situations may be more at risk.
Kadagathur added: “Financial education is vital and more support is needed to reach those who need affordable credit.
“There are currently as many as 15 million people in the UK struggling to access mainstream credit options – these are the individuals most at risk from predatory high-cost lenders, particularly in the current climate.”
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