Buy now pay later loans: the truth!

Following the publication of the Woolard Review of unsecured credit, the Treasury has announced that the Financial Conduct Authority will begin to regulate Buy Now Pay Later (BNPL) loans.

What are BNPL loans?

Even if you haven’t used them yet yourself, you might have spotted Buy Now Pay Later providers such as Klarna and Clearpay when shopping online. Mostly associated with clothes shopping, but now also used by a wider range of retailers, such as Currys, Buy Now Pay Later is a payment method that has gained massively in popularity over the last couple of years.

When you buy online from merchants that accept Klarna (or another BNPL provider), whether that’s Paul Smith or Pandora, Buy Now Pay Later allows you to spread the cost of purchases interest-free, or to put off paying for them until a later date. This means you can – for example – order some clothes, try them on, and return them if they don’t fit, without ever having to pay for them.

Sounds great – what’s the problem?

Although, on the face of it, this might not be that different from more traditional forms of credit such as buying from catalogues like Littlewoods, Buy Now Pay Later lending has raised some concerns.

For one thing, because of how heavily promoted BNPL payment methods are to customers of brands like H&M, New Look and boohoo, Buy Now Pay Later providers are seen to be targeting younger consumers – who might get themselves into more debt than they can deal with.

And unlike other forms of credit, up until now BNPL providers haven’t been regulated by the Financial Conduct Authority. This means they haven’t been required to put all the same safeguards in place as regulated lenders, to protect shoppers and make sure they’re fully aware of what they’re signing up for – including the potential impact on their credit score. This interview with campaigner and financial educator Alice Tapper lays out some of the issues.

As that article points out, Compare The Market found that nearly a fifth (18%) of UK shoppers have noticed more BNPL plans being offered to them since social distancing restrictions took hold.

But even before the pandemic, we’d noticed more customers coming to us for advice about BNPL loans. We raised concerns a year ago that we’d seen a rapid rise in the number of customers seeking advice who had one or more Buy Now Pay Later (BNPL) loans amongst their creditors. Our 2019-20 impact report found a further 50% rise in the number of new customers with BNPL among their debts – and some of those customers had as many as ten BNPL loans.

 

So what’s changed?

No new regulations have taken effect yet. But the Treasury has said that the Financial Conduct Authority will soon start to regulate this sort of loan. This means that in the near future, BNPL providers will need to:

• check that customers can afford the amount they’re borrowing
• ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments
• Make sure customers are aware of the consequences if they can’t make their payments on time.

So, in the words of Deborah Ware, chief operating officer at Financial Wellness Group: “It’s great news for consumers that the government has accepted the Woolard report recommendation that BNPL should be regulated by the Financial Conduct Authority. This type of lending is particularly targeted at younger consumers and, because its applied for at point of sale, shoppers are thinking more about what they are buying than whether they can afford the repayments.”