The Hidden Debt Risks of ‘Buy Now Pay Later’

An unexpected revelation has recently emerged concerning ‘Buy Now Pay Later’ (BNPL) services. According to a study conducted by Creditspring, a responsible lender, a staggering 16 million people in the UK remain oblivious to the fact that these services can lead to debt.

Key Points:

  • 16 million people in the UK don’t realise that ‘Buy Now Pay Later’ (BNPL) services can lead to debt, as per Creditspring’s findings.
  • One-third of respondents don’t associate BNPL purchases with potential debt, with this perception more prevalent (51%) among 18-24 year-olds.
  • Almost a third of the population doesn’t recognise BNPL as a form of borrowing akin to credit cards.
  • Half of younger individuals are not aware that missed BNPL payments can result in extra costs or late fees.
  • Nearly half of all respondents are oblivious to the fact that defaulting on a BNPL payment could result in a referral to a debt collector.

What is Buy Now Pay Later

‘Buy Now Pay Later’ is an innovative payment solution that has revolutionised online shopping. Essentially, it allows consumers to purchase items immediately but defer the payment to a later date. Typically, these services split the total cost into several smaller instalments, which are then paid over a specified period.

Some BNPL providers offer interest-free periods, making the option seemingly more affordable. However, it’s essential to remember that, much like a credit card, BNPL is a form of borrowing, and late payments or non-payments can lead to additional fees, impact credit ratings, and even result in debt.

Misconceptions about BNPL

The research brought to light some astonishing facts. Remarkably, one-third of the participants didn’t believe that BNPL purchases could result in debt. This misconception was especially prevalent among younger individuals aged 18-24, where over half (51%) shared this belief. Compared to the national average, this age group is 29% more inclined to utilise BNPL.

A Misunderstood Borrowing Mechanism

Another noteworthy finding was that nearly one in three respondents didn’t perceive BNPL as a form of borrowing, similar to a credit card. Once again, this misunderstanding was more common among younger individuals, with four in ten of those aged 18-24 remaining unaware of the risks associated with BNPL.

The Hidden Costs of Buy Now Pay Later

Age GroupUnaware of Extra Costs/Late Fees (%)
All Ages41%

The table above shows that the knowledge of the potential risks and hidden costs of BNPL remains disappointingly low. A significant 50% of younger individuals were unaware that late BNPL payments could incur additional costs or late fees, compared to 41% of the general population.

The study also disclosed that nearly half (46%) of all participants were not aware that defaulting on a BNPL payment may damage their credit scores and could potentially lead to a referral to a debt collector.

The research revealed that only 44% of BNPL users were able to repay their loans without any issues. Troublingly, one in ten (9%) confessed that their use of BNPL services had plunged them into debt. Additionally, only a quarter (23%) of BNPL users felt fully in control of their spending when using these services.

An empty wallet as a concept for debt and rising costs

The Need for BNPL Regulation

Despite the Financial Conduct Authority’s (FCA) guidance on BNPL regulation remaining unpublished, and reports of potential delays, it’s crucial to establish clear rules. Creditspring is advocating for lenders to ensure they are lending responsibly, particularly in light of the upcoming Consumer Duty guidelines.

The Potential Impact on Vulnerable Users

Finally, Creditspring expressed concerns about the disproportionate impact of BNPL on more vulnerable users. Those uncertain of their future financial stability may currently afford BNPL payments but could struggle in the future. As such, they run the risk of incurring late fees, adding another layer of complexity to the ongoing BNPL debate.

Neil Kadagathur, Co-Founder and CEO of Creditspring, comments: “Despite increasing usage, there is still a severe misunderstanding of how BNPL works. After around a year of rising costs, household finances have been stretched to breaking points – many are using BNPL as a crutch until payday without being fully aware of the risks of doing so. The onus has to be on lenders to ensure that borrowers understand the risks and support them before they rack up huge debt piles.  

If used correctly, BNPL offers more flexibility to UK shoppers – however, the issue is often in the way they are offered or promoted with little information around the risks of missed payments or multiple BNPL purchases until it’s too late. “

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