Buy Now Pay Later Schemes: How vulnerable do they make you?

Buy Now Pay Later (BNPL) schemes have become increasingly popular over recent years. They allow individuals to purchase goods and services and spread the cost (interest-free) over a number of monthly instalments. Some retailers have their own BNPL scheme, however many use a third-party provider such as Klarna, and Afterpay.

When an individual opts into a BNPL scheme, they enter a credit agreement. A credit agreement is a form of borrowing. When managed correctly these schemes can be a convenient way to finance purchases.

New government regulations are set to introduce crucial protections for users of BNPL schemes. From 2026, these regulations will require BNPL providers to carry out affordability checks and offer Section 75 protection on purchases.

When managed correctly these schemes can be a convenient way to finance purchases. However, it’s essential to be aware of the potential risks and vulnerabilities – especially as these new protections won’t be in place until 2026.

Is Buy Now Pay Later a good idea?

This form of borrowing can still be useful to spread the cost of purchases, especially with new regulations coming into force in 2026. BNPL providers will soon be required to check if consumers can afford repayments before offering loans, which adds a layer of protection. However, until these rules are fully implemented, it’s still essential to be certain that you can make the monthly repayments and that the purchase is necessary. These schemes might not be a good idea if:

• You have an unstable income.
• You’re facing long-term unemployment.
• You have a lot of other outgoing costs, like bills or other borrowing.

Can Buy Now Pay Later schemes get you into trouble?

With many household incomes being stretched in light of the cost of living crisis, individuals may look to BNPL schemes to make essential purchases. This can potentially make consumers vulnerable to financial hardship.

Historically, BNPL schemes were mainly used as a way to finance fashion and household item purchases. However, according to recent research, 1 in 5 BNPL customers are now having to use the schemes to finance essential purchases such as groceries, fuel, and utilities.

Other risks associated with BNPL schemes include

• Overspending – as individuals do not need to make payments upfront, this may lead to impulsive spending and debt accumulation. Multiple BNPL agreements can lead to a significant amount of debt if not managed carefully.
• Reliance – Relying heavily on BNPL can create a cycle of dependency, where individuals may struggle to manage their finances without the flexibility provided by these schemes.
• Interest and charges – while some providers offer interest-free repayments, many may charge fees if payments are late or missed.
• Poor financial literacy – some individuals may not fully understand the terms and conditions of BNPL agreements, potentially leading to financial mismanagement and unexpected costs.
• Credit score impact – missing or late payments can negatively impact an individual’s credit score. This can have long term consequences for an individual’s ability to borrow in the future.

Finally, and most importantly, BNPL schemes are not currently regulated by the Financial Conduct Authority (FCA). This means that customers are less protected and potentially at higher risk. However, the new rules will allow the FCA to regulate BNPL providers, introducing affordability checks and clearer terms to better protect consumers.

How can individuals reduce these risks?

Until the new protections are in place, individuals can still take steps to reduce their chances of falling into financial hardship due to BNPL schemes by considering:

• Make sure you can afford the repayments – by using BNPL, you enter into a credit agreement which is a form of borrowing. Missing payments can negatively impact your credit score.
• Consider if there are other ways to borrow this money, such as responsible lenders like credit unions. (Note that using a credit card means you will still owe money to the card provider).
• Budget and plan for payments to avoid accumulating debt. Setting up a Direct Debit means you are less likely to miss a payment.
  Consider if savings could be used to pay for purchases instead.
• Be aware of scams. Never click on suspicious links or provide personal information to unknown providers.
• Avoid using BNPL schemes if you are experiencing problem debt. Get free debt advice from organisations such as StepChange or Citizens Advice.

As these new regulations come into force, more protections will be available, but until then, it’s critical to manage BNPL responsibly.