Buy Now Pay Later: the risks of putting Christmas on credit

Experts are warning of the potential dangers of Buy Now Pay Later as research suggests more than one in four people will use such schemes to fund their Christmas costs. 

According to Citizens Advice, 28% of UK adults – equivalent to 15.1 million people – are likely to rely on BNLP this festive season. But lack of regulation means users are at risk of "unmanageable levels of debt and even bailiff action", the charity warned.

Regulation was "so close we could taste it" back in 2021, said MoneySavingExpert founder Martin Lewis, but since then "it has all gone quiet". And now another Christmas has rolled around, amid a cost-of-living crisis, when vulnerable people are "tempted to borrow, and to spend, by this ubiquitous form of debt-payment".

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What is Buy Now Pay Later?

BNPL is a credit agreement that lets consumers spread the cost of paying for goods or services over an agreed period in equal instalments, or pay in one go after a set period. 

With short-term agreements of up to two or three months, BNPL is usually "entirely free of interest or fees", The Times Money Mentor, with the BNPL firms making money by taking a commission from the retailer.

But this type of borrowing can "quickly become expensive" if you miss repayments, said Experian, as there may be late payment fees, which can affect your credit report. 

And the sector is currently unregulated, despite pledges by the government back in 2021 to introduce tough new rules. 

Why do people use BNPL?

Analysis by the Financial Conduct Authority (FCA) found that 27% of UK adults had used BNPL at least once in the six months prior to January 2023, up from 17% in the 12 months up to May 2022.

Explaining why BNLP is so "popular", The Times Money Mentor said that "as well as often being free", users don’t have the "commitment and temptation" associated with credit cards and overdrafts.  And since users "don't pay anything upfront", they can try on items such as clothes and then send them back if necessary, "without the money leaving their bank".

Plus, there are no long-term agreements "to tie you down", since the credit agreement is closed once the money is paid off.

Polling for Finder of 2,000 people found that the chief appeal of BNPL was "ease and convenience" (44%), followed by the ability to spread costs over time (41%), interest-free payments (39%) and the ability to pay for otherwise unaffordable purchases (30%).

The risks of BNPL

Although BNPL may offer consumers "more flexibility", said Finder, the offer of interest-free instalments can also "lessen their perceived risk of debt and lead to overspending and ensuing problems".

Research by Citizens Advice found that 21% of BNPL users had missed or made a late payment over the previous 12 months, with one in ten of those "visited by an enforcement agency or bailiff as a result". And almost a third of users who were due to make a payment had borrowed money to repay their instalments, "meaning their initial debt is only leading to more debt". 

The charity has recorded a 67% increase year-on-year in people seeking help with BNPL debts and is calling for further regulation to be brought forward to tackle the "worrying trend".

The FCA has used consumer rights laws to secure what the watchdog described as "changes to potentially unfair and unclear contract terms in this sector".

But because the sector remains unregulated, said The Times Money Mentor, BNPL  does not offer the same consumer protections as products such as credit cards, and users may also be unable to "escalate" complaints to the Financial Ombudsman Service.

BNPL users can take steps to protect themselves, such as setting up direct debits to ensure payments are made on time. 

However, avoid using BNPL "if you’re already in problem debt", said MoneyHelper. And before taking out any borrowing agreement, ask yourself, “if you had an unexpected expense, would it make you miss a payment?”