Nearly a third (33%) of UK’s young adults are shopping with controversial Buy Now/Pay Later plans.
Research by data company Equifax shows that an estimated 15million adults of all ages are using this form of credit – an increase of more than 2million since the start of the year. Around 30% of UK 20-30-year-olds are among them.
These schemes are offered by Clearpay and Klarna, household names that allow customers to pay monthly instalments instead of upfront.
However, critics say the schemes encourage people to spend money they don’t have and accrue large hidden debts.
The UK’s fiscal watchdog found that shoppers could ‘easily’ rack up £1,000 worth of debt through the schemes and warned that bringing the sector under control was a ‘matter of urgency’ following a review.
Their popularity exploded last year, with spending tripling to £2.7billion during the pandemic as Instagram influencers promoted the services.
In the UK, almost a third (33%) of all young adults are shopping with controversial Buy Now/Pay Later plans
These schemes are offered by Clearpay and Klarna, major household retailers. Customers can pay their monthly shopping bills in instalments rather than in one lump sum.
More than half of the UK’s biggest online retailers analysed were offering at least one form of payment plan, consumer watchdog Which? found.
The majority were heavily promoting the schemes – yet several did not offer information on the dangers of late payment.
Research by Citizens Advice found those using ‘BNPL’ were charged £39million in late fees over the past year. Which? said the failure to ‘clearly communicate the risks’ could leave customers with poor credit ratings or even referred to a debt collector.
Simon Kendall is an independent debt advisor who said that many Leeds clients are already in deep debt when they signed up for Buy Now, Pay Later.
‘The industry’s gone absolutely massive and there’s been a big boom,’ he told BBC Panorama.
‘I would say about 30 to 40 per cent of my clients have used it in some form, whether it’s on this short term, quick fix sort thing or whether it’s small, long term and it’s a regular thing for them.
‘I’m seeing probably more increase in families using it to get by, 30 to 40 years old. Clients aren’t coming to see us due to Buy Now, Pay Later. That’s often the tip of an iceberg.
‘There’s normally some underlying issues – payments to Buy Now, Pay Later products are worse than them, making their financial situation even worse.
‘Some of these clients should never have been able to apply in the first place.’
It is currently examining how interest-free Buy Now and Pay Later services can be regulated. It says regulation should be ‘balanced and proportionate, ensuring customers are given appropriate protections’.
BBC Panorama interviewed three popular Buy Now,Pay Later programs and discussed some concerns about affordability and debt.
Klarna said its ‘interest and fee-free short-term credit products are helping keep people out of debt’. It added that the credit it offers is linked to ‘a specific purchase with clear repayment plans and affordability checks to steer people away from debt’.
Clearpay said it has ‘low initial spending limits, which only increase after customers consistently pay on time’, adding that it pauses an account if a single payment is missed ‘so customers cannot revolve in debt’.
Consumers may find it cheaper to divide the cost in interest-free installments than to borrow more.
These products are often provided by companies that have a relatively recent and technologically-driven approach.
The service providers partner with the retailers in order to provide consumers access to financial services that help manage their finances without the need to complete formal or detailed applications.
Retailers will pay a certain percentage to BNPL lender on the grounds that they will drive sales. If there is an option to spread costs, shoppers may buy more.
Critics say the schemes encourage people to spend money they don’t have and accrue large hidden debts
If a person cannot make their repayments on time, they may be required to pay late fees.
According to the review, products can often be seen as an alternative to traditional forms of regulated borrowing by those with poor credit histories or weak credit ratings.
Because such activity is not generally recorded by credit reference agencies, it can be easy to accumulate £1,000 of debt without this being visible to other lenders, the review found.
One-tenth of customers at a bank had already fallen behind when they started using BNPL.
Also, consumers’ perceptions of these products vary widely.
BBC Panorama’s Buy Now, Pay Later: The New Debt Crisis? The programme will be broadcast on BBC One tonight at 7:35pm, followed by iPlayer.