More Britons have borrowed through buy now, pay later services since the start of 2021 than they have taken on traditional debt such as bank loans or mortgages, according to a new study.
Ten per cent of adults had used the BNPL, while 6 per cent had taken out a mortgage, 3 per cent had taken out a bank loan and 2 per cent had used an authorized overdraft with interest, according to research from loan provider Creditspring.
Despite their growing popularity, about a third of adults were unaware that BNPL plans were a form of borrowing.
BNPL systems are third-party services such as Klarna, Afterpay and ClearPay, which appear at online checkouts and give the buyer the option to split their payment into installments.
One in four young adults have used an BNPL scheme in the past 15 months, with charities warning consumers of the dangers of borrowing more than you can afford to repay
While many offer interest-free options, interest may be charged on higher value items or longer loan terms.
Fees are usually charged if the borrower repays late, and their details may eventually be passed on to debt collectors.
Despite this, the Creditspring survey found that one in seven adults thought it was ‘impossible’ to get into debt using BNPL, rising to one in four among those under 35.
Young adults are among the most frequent users, with one in five having used deferred payment systems in the past 15 months.
These misconceptions could mean millions of UK borrowers are at risk of damaging their credit records or getting into debt unintentionally.
The charity Stepchange and Citizens Advice have warned that the cost of living crisis could increase reliance on BNPL in 2022.
Richard Lane, director of external affairs at StepChange, said: ‘Because of the way BNPL services are marketed at checkouts, younger consumers – who tend to be less financially experienced – often don’t realize that they take out credit at all.
“These services are presented as a convenient way to shop and do not give individuals the opportunity to stop and think about the consequences of taking out credit and the financial difficulties that may arise later.
“For someone considering using BNPL, keep in mind that while it may be interest-free, it is still borrowing and will need to be repaid.
“It is important to recognize that BNPL is like any other debt, and you should never borrow more than you can afford.”
According to Creditspring, four in five adults would be unaware that BNPL schemes are unregulated in the UK, while half were unaware that a person could be referred to a debt collector for missing an BNPL payment.
A further 43% said they were unaware that BNPL suppliers could add late payment fees.
Around one in four adults under the age of 35 thought they could not get into “serious” debt using the services, which Citizens Advice said was a worrying state of mind.
Matthew Upton, director of policy at Citizens Advice, said: “Buy Now Pay Later loans can be like quicksand – easy to slip in and very hard to get out of.
“Our real fear is that people don’t understand what they are getting into or the consequences if things go wrong. The government must urgently pursue the regulation of the BNPL sector.
Charities urge clients who use BNPL to understand the risks of borrowing
According to the FCA, there were £2.7bn of BNPL transactions in 2020, with research suggesting the market more than doubled to £5.7bn last year.
Last year, the government announced a consultation on the regulation of the BNPL industry, but this has yet to be implemented.
Neil Kadagathur, Co-Founder and Managing Director of Creditspring, said: “Since payday lending was driven from the mainstream, BNPL has been seen as the new wild west in the lending industry.
“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 need to be protected – currently they are in real danger of falling into another credit trap as they continue to rely on BNPL as a crutch to fight on until payday.
BNPL’s services have been used more than traditional lenders, including loans, mortgages and car financing, since January 2021
“The worst-case scenario is that borrowers may end up getting a knock on the door from a debt collector, but currently the vast majority are completely unaware that that’s even a possibility.”
He also said that since it was currently easier to access the BNPL than to qualify for a credit card, those in a precarious financial situation could be most at risk.
Kadagathur added, “Financial education is vital and more support is needed to reach those who need affordable credit.
“Currently, there are up to 15 million people in the UK struggling to access traditional credit options – these are the people most at risk from high cost predatory lenders, particularly in the climate current.”
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.