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. However it is important to be aware of the potential risks and vulnerabilities associated with these schemes.

Is Buy Now Pay Later a good idea?

This form of borrowing can be a useful way to spread the cost of purchases when managed carefully. However, it’s only a good idea if you can be certain that the purchase is essential and that you can make the monthly repayments. 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 put at higher risk. However, the FCA is currently consulting on regulating BNPL schemes. BNPL providers will be required to conduct affordability checks before approving loans and to provide consumers with clear information about their terms and conditions.

How can individuals reduce these risks?

Individuals can 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.