“Buy now, pay later” outperforms “traditional” debt like a mortgage or car loan

More Britons have borrowed through Buy Now, Pay Later services than traditional debt such as bank loans or mortgages since the start of 2021, new research shows.

According to a study by lender Creditspring, 10 percent of adults had used BNPL, while 6 percent had taken out a mortgage, 3 percent had taken out a bank loan, and 2 percent had taken out an approved, interest-bearing overdraft.

Despite their rising popularity, around a third of adults were unaware that BNPL programs are a form of borrowing.

BNPL programs are third-party services such as Klarna, Afterpay and ClearPay that appear at online checkouts and give the buyer the option to split their payment into installments.

One in four young adults has used a BNPL scheme in the past 15 months, with credit organizations warning consumers of the dangers of borrowing more than you can afford to pay back

While many offer interest-free options, higher value items or longer loan periods may charge interest.

Fees are usually levied if the borrower is late in repaying, and their details may eventually be shared with collection agencies.

Even so, Creditspring’s poll found that one in seven adults thought it was “impossible” to get into debt with BNPL, rising to one in four for those under 35.

Younger adults are among the most common users, with one in five having used deferred payment schemes in the past 15 months.

These misunderstandings could mean millions of UK borrowers risk corrupting their credit reports or unknowingly getting into debt.

Debt relief agency Stepchange and Citizens Advice have warned that the cost of living crisis could increase BNPL dependency in 2022.

Richard Lane, director of external affairs at StepChange, said: “Because of the way BNPL services are marketed at the checkout, younger consumers – who tend to be less financially savvy – often don’t realize they are taking out a loan in the first place.

“These services are presented as a convenient way to shop and do not allow individuals to stop and think about the implications of borrowing and the financial difficulties that may arise later.

“For someone considering using BNPL, remember that although it is interest-free, it is still a loan and must be repaid.

“It’s important to realize that BNPL is like any other debt and you should never borrow more than you can afford.”

According to Creditspring, four in five adults are said to be unaware that BNPL schemes are unregulated in the UK, while half were unaware that a person can be referred to a debt collector if they miss a BNPL payment.

Another 43 percent said they were unaware that BNPL providers could charge a fee for late payments.

About one in four adults under the age of 35 believed they couldn’t incur “serious” debt using the services, which Citizens Advice said was a worrying mindset.

Matthew Upton, director of policy at Citizens Advice, said: “Buy Now Pay Later loans can be like quicksand – easy to get in and very hard to get out.

“Our real fear is that people won’t understand what they’re signing up for or the consequences if something goes wrong. The government urgently needs to step up regulation of the BNPL sector.’

Debtor organizations urge customers using BNPL to understand the risks of borrowing

Debtor organizations urge customers using BNPL to understand the risks of borrowing

According to the FCA, there were £2.7 billion worth of BNPL transactions in 2020, with research suggesting the market has more than doubled to £5.7 billion in the past year.

Last year, the government announced a consultation to regulate the BNPL industry, but it has yet to be implemented.

Neil Kadagathur, Co-Founder and CEO of Creditspring, said: “Since payday loans were pushed out of the mainstream, BNPL has been seen as the new wild west of the lending industry.

“Regulation is welcome, but the 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 – they are at real risk of falling into yet another credit trap as they continue to rely on BNPL as a crutch to get them through to payday.

BNPL's services have been used more than regular lenders since January 2021, including loans, mortgages and auto financing

BNPL’s services have been used more than regular lenders since January 2021, including loans, mortgages and auto financing

“The worst-case scenario is that borrowers end up having a knock on their door by a collection agency, but currently the vast majority are completely unaware that this is even possible.”

He also said that since it is currently easier to access BNPL than to qualify for a credit card, those in vulnerable financial situations may be most at risk.

Kadagathur added: “Financial literacy is vital and more support is needed to reach those who need affordable credit.

“Currently, up to 15 million people in the UK are struggling to access popular credit options – these are the people most at risk from predatory, high-priced lenders, particularly in the current climate.”

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