“Buy Now Pay Later” could be UK's next 'credit trap' scandal, loan provider warns
Posted on in Business News , Cycles News
The rapid growth in the use of Buy Now Pay Later (BNPL) services risks becoming the UK's next 'credit trap' scandal, a loan provider has warned.
A report from Creditspring said a lack of education and awareness of the potential consequences of high-cost borrowing meant 'poorly financially informed customers' were increasingly relying on BNPL as a 'crutch' ahead of payday.
BNPL allows customers to split the cost of purchases into instalments, often with no interest or charges unless they fail to pay back on time. The warning comes at a time when credit reporting agency Equifax is saying that a third of adults have now used buy now, pay later (BNPL), with 4.1 million people using this type of credit for the first time in 2022. It found that use of BNPL hit an all-time high in the lead up to Christmas 2022, and it predicts that use will continue to increase in 2023.
Creditspring has joined charities and politicians in sounding the alarm over the unregulated industry, with its report noting that a third of people did not know that using BNPL could put them in debt.
The report noted that 13% of those surveyed used BNPL 'because their friends do', a figure that rose to 23% among the under-25s.
'Unawareness of the cost and consequences – combined with peer group encouragement and ease of access – means that BNPL usage is likely to increase,' the report said.
The report said that 24 per cent of people said they had struggled to pay back BNPL loans, up from 15 per cent last year, with 17 per cent missing at least one payment.
The latest BNPL Barometer from Equifax analysed data from more than 23,000 people who hold current accounts, and 2,000 consumer interviews.
It found that one in eight (13%) people have used BNPL to pay for a meal or takeaway, and a similar number (12%) have used it to spread the cost of everyday consumables such as groceries or toiletries.
The Equifax research found that one in three (34%) Brits have now used BNPL services, up from 26% in November 2021. This suggests that 4.1 million people chose to use the payment method for the first time in 2022.
Equifax’s study found that more than one in 10 (11%) people expected to use BNPL for their Christmas shopping, and a similar number (12%) said they would use it in the January sales.
Creditspring said users were also risking their long-term ability to borrow if their credit score was affected.
It also warned the lack of regulation meant ill-informed customers could sign up for multiple BNPL services at once, increasing the risk that they will default on loans.
Creditspring called on lenders to 'ensure borrowers fully understand the risks.' It proposed removing 'confusing' terminology to make the true cost of borrowing clear.
The ACT has previously raised concerns about the improper regulation of BNPL providers and the risks that this brings to potential customers.
If you would like to talk to someone from the ACT about how we can help find the right finance provider for you please get in touch.