Buy now, pay later (BNPL) is the checkout option of choice for thousands of people looking to spread the cost of their purchases and finance higher-ticket items that they cannot afford immediately.
The problem is that, while interest-free loans and great user experiences sound positive, there is a huge caveat - the lending is not regulated.
In a throwback to the crisis that hit when the original payday loan providers first launched without regulation, MPs and consumer rights advocates have dubbed BNPL "the new Wonga". Referring specifically to the original UK loan website that launched in 2006 (an unrelated South African version of the brand trades today as a regulated 'instalment loan' provider which is a much safer and more stable form of credit in comparison to the formerly unregulated payday loan).
The 2006 UK Wonga was the beginning of a deluge of online consumer lending that quickly spiralled out of control, leaving many customers trapped in debt they could not escape from.
This crisis prompted a series of global reforms to help protect consumers and impose stricter criteria for lenders. Similar calls are now ringing out for swift action to plug the regulatory gap and protect vulnerable users from the dangers of unchecked debt.
How Does Buy Now Pay Later Work?
BNPL works just as it sounds. You checkout from a retailer as normal but don't need to pay for your purchase straight away.
A lot depends on which option you choose and which BNPL providers are offered on the specific site, but usually, you can:
- Defer your payment for 30 days.
- Split the cost into monthly instalments.
- Repay the purchase value over the next few weeks.
If you repay your debt on time, you won't be charged interest. However, it is important to check the small print!
Even though the marketing will show the BNPL as cost-free, that only applies to shorter terms, and you may pay more for a longer repayment period.
Another factor is late payments. Especially if you have bought lots of goods with a BNPL checkout, the repayments can rack up quickly.
If you don't pay every loan back on time and in full, you will be charged either an interest penalty or a lump sum.
This fee is added to the debt and may accumulate the longer it takes you to pay.
While you won't see any impact on your credit score, provided you keep up with the instalments, you might find that if you miss a payment or end up in default, you will have an adverse record on your credit history for up to six years.
Why Are Buy Now Pay Later Firms Unregulated?
Regulation, in a nutshell, means that lenders such as banks, credit card providers and loan companies need to comply with a strict list of rules around things like:
- The maximum interest they can charge.
- How they advertise borrowing products.
- Methods used to sell those products to consumers.
A lack of regulation means that customers are potentially at risk and that there is no central body overseeing the policies and behaviours of BNPL lenders.
This lack of regulation exists because the vast majority of BNPL products are 'free' - so if the lender isn't charging interest, they fall outside of the remit of the Financial Conduct Authority (FCA).
That changes a little for longer-term deals where you pay interest for the privilege of an extended-term.
Still, just about every BNPL checkout option is in this unregulated category.
We'll come onto the risks of an unregulated credit sector shortly, but there are compelling statistics that show how quickly BNPL is growing and why the time to act needs to be now:
- Usage of BNPL products tripled in the year to February 2021, meaning that the larger usage levels mean a correspondingly higher risk.
- Research shows that users often don't realise that BNPL is a credit product and decide to use it without understanding late payment consequences.
Lenders skate just under the regulation threshold, which states that loans are exempt if they have fewer than 12 repayments, the term is 12 months or less, and there is no interest charge.
If we consider late payment charges (rather than interest) or fines for non-repayment, it becomes clear that BNPL isn't always free.
These loans walk a line between providing a valued consumer service and deliberately staying outside of the legal scope of regulation.
What is the Risk of Buy Now Pay Later Lending?
The primary issue with BNPL lending is that it doesn't harness the responsible lending checks and affordability assessments that apply to regulated forms of credit.
Lenders aren't obligated to disclose mandatory information during the sign-up process, so uninformed consumers have little guidance to help them make clear decisions.
That means:
- Shoppers in serious debt, and even amid a managed debt repayment plan, can take out financing without any checks on their credit record.
- There are limitless opportunities to keep spending, buying products on multiple websites simultaneously without adding up the repayments.
- Fee-free borrowing is easy to market, but the charges for late payments and the potential to run into issues with debt recovery are significant.
A Citizens Advice survey in November 2021 found that one in ten people intended to use BNPL to finance Christmas spending. In the same month, the BBC reported that over 17 million people in the UK had already used BNPL to purchase something online.
Some BNPL providers have started to incorporate soft checks that won't appear on your credit record and give a vague overview of your ability to take on a new financial commitment.
However, that is the bare minimum and isn't sufficient to meet the financial promotion standards that say lenders must make sure they do not promote a product to someone without the means to repay.
With growing calls to regulate the BNPL credit sector, and advice for consumers to exercise caution, we will wait and see whether the scope of the FCA changes and what that means for cheap (or free) financing, encouraging us all to get spending-happy at the checkout.
