The UK’s popular buy now, pay later (BNPL) schemes are causing a surge in late repayment fees, especially among young consumers, as revealed by recent research. This trend highlights the growing reliance on this unregulated form of credit amid the escalating cost of living crisis.
Understanding BNPL’s Appeal and Risks
BNPL services, like those offered by Klarna, Clearpay, Laybuy, and PayPal Credit, have seen a rise in popularity. These services enable consumers to make purchases, such as clothes or food deliveries, and pay in interest-free weekly or monthly installments. However, late repayments attract fees, and this is where the problem starts.
According to the Centre for Financial Capability, a UK-based financial education charity, about 22% of BNPL users missed repayments in the six months leading to December 2023. The fallout is significant: over a quarter of these individuals either suffered a credit score hit or faced debt collection agencies. Young people, aged between 18 and 34, are most likely to be charged late fees.
Interestingly, while there’s a slight overall decline in the number of users hit by late fees in 2023, there’s an uptick in the number of older individuals (55 and over) facing fines for missed repayments, rising from 7% to 10%.
The Cost of Living Crisis
Jane Goodland, a trustee of the Centre for Financial Capability, emphasises the impact of the ongoing cost of living crisis. Many turn to BNPL schemes without fully grasping the risks. The charity’s research shows that 21% of users are unclear about the late repayment fees and the potential damage to their credit scores.
BNPL usage is growing among those aged 25-65, with the highest popularity among the younger demographic. One-third of UK adults have used BNPL, compared to 40% of those aged 18-34.
The survey highlights that a quarter of all BNPL users or potential users resort to this option due to inflation and rising living costs. This figure jumps to 30% among those aged 65 or over.
The Unregulated Terrain of BNPL
Currently, BNPL schemes in the UK are unregulated, allowing providers to bypass affordability checks. This lack of regulation can lead consumers into a debt spiral, accumulating bills from various late repayment fees across different providers.
Recognising the risks, the UK government proposed regulating interest-free BNPL products in February 2021. The Treasury launched a consultation in early 2023, aiming to bring the sector under regulation by the end of the year. This move follows Australia’s decision in May of the previous year to bring BNPL under consumer credit regulation.
The Urgent Need for Consumer Protection
Goodland stresses the urgency to protect consumers from potentially dangerous financial trends like BNPL. She advocates for a combination of financial education and government regulation to safeguard consumers effectively.
In conclusion, while BNPL offers a convenient payment option, its unregulated nature and the rising incidences of late repayment fees, particularly among young and older users, signal a need for caution and more robust consumer protection measures.