Buy now pay later (BNPL) services have grown in popularity since they were first introduced in 2016, with almost 4 in 10 Brits having utilised them as a means of cutting immediate purchase costs. In fact, these services have embedded themselves in consumer consciousness so much so that 9.5 million shoppers would avoid buying from retailers that don’t offer some kind of BNPL option.
Much like credit cards, BNPL services allow the individual to purchase and receive an item on credit, paying for it at a later date, either in one instalment or across multiple payments. However, BNPL’s USP is the option of a longer interest-free payback period, an attractive option for many during periods of economic uncertainty such as the Covid-19 pandemic and the current cost-of-living crisis.
However, while BNPL may seem like an ideal, straightforward payment method, the consequences of such an easy way to take on debt can have catastrophic ramifications for consumers if not handled carefully. Firstly, BNPL comes with a higher APR for those who opt for a longer repayment period, so whilst upfront the initial interest-free period many BNPL providers offer may seem like an attractive idea, if those repayments cannot be met, it could end up costing consumers significantly more.
In addition to this, some lenders are also asking consumers for an upfront settlement fee after the agreed interest-free period or adding a lump sum of interest to the debt. If payments are not made within the lender’s schedule, late fees can also be incurred and have a negative impact on the consumer’s credit score. Typically, BNPL doesn’t affect your credit score, which is what makes the method so attractive to so many shoppers. However, what many don’t realise is that it does negatively impact it when the payments are missed — something which isn’t communicated clearly enough by many BNPL firms.
With the service being used by many younger shoppers—50% of gen z and 54% of millennials admit to using BNPL services—firms like Legal UK Services are calling for more to be done to educate consumers about financial literacy and the effects of such credit options. While the ease of accessing BNPL services is attractive, it would be more ethical for providers to carry out affordability checks on consumers before allowing them to make these kinds of purchases. Without such checks, many individuals are taking out these loans despite having no way to pay them back. At a time when consumers are more vulnerable than ever before, safeguarding people from insurmountable debt must take priority.
Currently, an overwhelming number of adverts for BNPL fall short of providing clear and crucial information on when fees are due and the consequences of not meeting payments. This has led to many consumers have been mis-sold BNPL agreements.
Recently, the Financial Conduct Authority (FCA) has written to firms to advise them on the regulatory requirements of financial promotions used to sell BNPL in order to protect the most vulnerable. However, it is not just adverts that are driving the mis-selling of such services. The terms and conditions many of the providers use are also misleading and do not provide the detailed information a consumer requires in order to fully understand the consequences of BNPL.
Whilst regulations for adverts will help to eliminate those being mis-sold BNPL, more regulation needs to be put in place for these lenders to determine the affordability of consumers. This, coupled with a better education process on the consequences of BNPL, should hopefully deter it from becoming an impulse purchase method and instead be used as a credit option only for those who fully understand the process and can afford the repayments agreed upon.
By Elaine Walker, Director at Legal UK Services
