The Centre for Financial Capability (CFC) has issued a warning about the dangerous financial risks of buy now pay later (BNPL), calling providers in the sector “wild west credit services”.
Around a third of consumers have used buy now pay later services, despite the risks of late payment fees, low credit scores and debt collectors, polling by the financial education charity found.
Buy now pay later is a form of short-term financing that allows consumers to pay for purchases over a period of weekly or monthly installments, rather than the full amount upfront.
BNPL providers include Klarna, Clearpay, Laybuy and PayPal Credit. Several banks including NatWest, Virgin Money, HSBC and Monzo have also all launched BNPL products.
The CFC survey found that about a quarter of those who have used the services have been charged late payment fees, which rises to a third of 18 to 34-year-olds. The poll revealed that around a quarter of BNPL users have missed one or more repayments in the past six months, and of those, more than a quarter had been contacted by debt collection agencies.
BNPL is currently unregulated in the UK, with this type of lending becoming increasingly popular over the past few years, despite the financial risks.
Many unclear of buy now pay later fees
The CFC carried out the same polling in both 2021 and 2022. The findings from 2023’s polling showed high levels of anxiety over Christmas and a continued high level of usage of the services across all age groups, amid growing economic uncertainty and rising living costs this year.
The CFC said users, predominantly young adults, who are not fully aware of the high hidden charges and risks are being encouraged to use BNPL to finance shopping.
The charity found that a third (33%) of UK adults have used BNPL services in the past. This rises to 40% of 18 to 34-year-olds. A quarter (25%) of those who used or intend to use BNPL do so because of the current increase in the cost of living and inflation. For those aged 65+, this number rises to 30%.
Nearly a fifth (17%) of those questioned had used or intended to use BNPL services to pay for additional costs at Christmas, and more than a quarter (28%) used or intended to use the services because they were unable to pay for full costs at the time.
The CFC found that about a fifth (21%) of BNPL users were unclear what the late payment fees would be if they missed a repayment and unclear about the impact on their credit score if they missed a repayment.
The CFC found almost a quarter (22%) of those who had used BNPL services had been charged late payment fees. This rose to 32% of 18 to 34-year-olds.
Of those who had missed repayments in the past six months, around two thirds had missed payments twice or more. More than a quarter (29%) of those who missed repayments had a decreased credit score as a result, or had been contacted by a debt collection agency (27%).
Although BNPL is generally interest free, providers charge for any missed payments and customers might be tempted to spend more than they can afford. If payments are late or missed, this can affect a person’s credit score.
BNPL is currently unregulated in the UK, meaning that there is no duty for the providers to run background and affordability assessment checks on borrowers. This allows people to get into further debt, as they could rack up multiple bills from separate late payments to the schemes.
The dangers of buy now pay later
Jane Goodland, trustee of the Centre for Financial Capability, said: “These figures reveal the ongoing prevalence of BNPL schemes, and the dangerous financial risks that users face in this wild west unregulated market. As the ongoing cost-of-living crisis continues to impact the British public, it is apparent that many users are increasingly reliant on these schemes, without fully understanding the risks involved.
“Most worryingly, our findings released today have revealed the significant number of those using the schemes who have fallen victim to late payment fees, poor credit scores and even contact by a debt collection agency.
“For a third year in a row, our polling shows the high usage of BNPL across all age groups, despite some of the clear risks involved. The Government has promised regulation on this market but we are still yet to see this.
“As trustee of a financial education charity, I recognise firsthand the urgent need to ensure that consumers are protected from dangerous financial trends, such as BNPL. At the very least, we must offer a high-quality and effective financial education to all people from a young age, so they feel equipped with financial resilience skills to face these emerging trends.”
Related: GUIDE: Everything you need to know about Buy Now, Pay Later
