Almost eight million Britons currently have significant outstanding balances with buy now pay later (BNPL) providers, averaging £538 each, according to new research.
An estimated 7.7 million UK shoppers are now indebted to BNPL providers, according to the credit broker, Credit Karma, and that figure is expected to rise as more and more shoppers are drawn in by interest-free borrowing on offer.
BNPL providers have acquired an estimated 1.6 million new customers in 2021, bringing the total active customer base to 11.6 million, according to Credit Karma’s research.
Impulse shopping: Almost half of buy-now, pay-later purchases are made on nonessential items, such as electronics, cosmetics or holidays, according to Credit Karma.
By the start of October this year, Credit Karma’s research suggests that Britons had spent a combined £5.79 billion via BNPL, with £4.12 billion of this still left to repay.
Furthermore, it found that nearly half of BNPL shoppers admit to falling behind on payments, whilst nearly a third have seen their credit score drop as a result, with a similar number claiming to have been rejected for a mortgage or other borrowing after missing repayments.
Ziad El Baba, general manager at Credit Karma, said: ‘Buy now pay later services can be a great tool for people who wish to make a purchase and break up their payments into smaller, more manageable amounts.’
‘However, borrowers must be cautious about how much debt they take on via BNPL and make sure they’re able to follow through with the terms of the arrangement.
‘This is especially important since missing a payment can have a negative impact on your credit score, which can make borrowing more costly for consumers down the line.’
Is BNPL debt safer than credit cards?
Unsurprisingly Klarna, a leading BNPL provider, argues that credit card debt is far more risky than debts with BNPL providers.
And it may have a point.
UK households have an average credit card debt of around £2,058, according to the Money Charity, whilst the average APR on a credit card is 26.2 per cent, according to Moneyfacts.
A customer with a £2,058 balance, paying the minimum monthly payment of 3 per cent (£61) with the average APR of 26.2 per cent could expect to lose £1,289 in interest over a 34 month period, according to Moneyfacts.
Klarna, however, currently charges no interest or late payment fees for its Pay in 30 days and Pay in 3 instalment products.
However, there is some risk for those requiring longer-term financing for big-ticket items, which may require spreading the cost over six months or more.
If you fail to keep up with your monthly repayments, any promotional interest rate you may have secured may be cancelled and instead replaced with an interest charge up to 18.9 per cent.
Some personal finance experts are concerned that BNPL schemes can encourage some people to spiral into debt.
Alex Marsh, head of Klarna UK said: ‘Unlike credit cards, Klarna doesn’t add anything to the cost of purchases – no hidden fees or interest – which makes it a fairer and more sustainable form of credit.’
‘We check that consumers can repay every time they use Klarna and give them a clear, short term repayment plan so they don’t stay in debt.’
Klarna withdrew its £12 penalty fee on its financing product earlier this year, but concerns still remain over the potential debt spiral shoppers can fall into and the activities of other BNPL providers.
For example, providers including Clearpay and Laybuy, have hit customers with a £6 charge if they are just 24 hours late with their payments – then levied another £6 fee if the overdue payment was not made within the next seven days.
On orders less than £24, Clearplay may charge one late fee of £6 if you do not pay an instalment under a Clearpay Plan by the due date.
For orders over £24, late fees are capped at £6 by Clearplay, whilst for orders of £24 or more the late charge is capped at whichever is less out of £36 or 25 per cent of the order value.
Similarly Laybuy charges £6 for failing to repay and then a further £6 each week up to a cap of £24.
If the worse comes to the worst, Klarna, Laybuy and Clearplay may also arrange for a debt collection agency to collect from you the amount owed.
As many as one in ten BNPL customers have been chased by debt collectors after missing payments, according to Citizens Advice.
The charity’s research also found shoppers have been charged as much as £39million in late fees over the past year.
What is more damaging for your credit score?
Most BNPL providers reserve the right to report missed payments to credit reference agencies, and these could then in turn be shown on a person’s credit report, which can negatively impact the score.
However, repaying your BNPL debt on time won’t currently improve your credit score, regardless of who the provider is.
In theory, the providers could report the on-time payments you make to a credit reference agency, but at present none of them do so.
A credit report shows a list of a person’s credit accounts, such as bank accounts, credit cards, utilities and mortgages. It will also display their repayment history, including late or missing payments.
The credit score, also known as a credit rating, is a three-digit number that reflects this information and enables lenders to establish how reliable you are when it comes to repaying money.
Credit cards have the advantage of section 75 purchase protection as well as also having the potential to improve a person’s credit score.
Keith Kilcourse, credit and loans publisher for the comparison site, Finder, said: ‘Missed payments are one of the worst things you can do for your credit file, as prospective lenders will of course worry that you might not pay them back if they lend to you.
‘An exception here is Klarna, which doesn’t charge late payment fees and says missed payments for its Pay in 30 Days and Pay in 3 Instalments deals will not be reported to credit reference agencies.
‘Using BNPL is not a viable way of improving your credit score as the providers don’t say they will report payments to the credit reference agencies. However, Klarna has said it’s reviewing this, and it might change in future.’
Similar to BNPL schemes, credit cards, when managed badly can be detrimental to a person’s credit score, however, When managed well and paid off in full each month, it can help do the exact opposite.
According to Experian, keeping card balances below 30 per cent of the limit can add 90 points to your Experian credit score, whilst using more than 90 per cent of a credit card’s limit could take around 50 points off.
‘Provided you exercise self-discipline, credit cards can offer similar flexibility to BNPL schemes while offering additional benefits such as building your credit,’ said Kilcourse.
‘However for those who are new to credit, it’s probably fair to say BNPL presents a more gentle introduction where you’re less likely to incur interest or damage your credit score.’
Which is best to use?
Credit cards if mismanaged have the potential to be even more expensive for shoppers.
Kilcourse adds: ‘For credit cards, minimum monthly repayments are typically set at low levels, which means it can take a long time to repay debt – unless you increase payments – so you can end up paying a lot in interest.
‘Also, if you regularly miss payments, your credit score will be negatively affected.’
However, credit cards also offer a host of benefits such as cashback on spending, points to put towards air travel, interest-free balance transfer to clear debts and in some cases, free usage abroad.
You can find out our pick of the best credit cards in our most recent review.
Klarna is one of the most highly-valued BNPL providers with a $45.6 billion valuation.
Credit cards also offer better protections to shoppers as you will be covered under Section 75 of the Consumer Credit Act.
This affords shoppers protection when buying items between £100 and £30,000 and allows shoppers to make a claim against their credit card company to get their money back if a retailer or trader lets them down and refuses to honour the contract.
BNPL will not afford such protection.
Both BNPL and credit cards allow you to spread the cost of your spending into more manageable payments.
For all the perks, it is vital credit card customers pay off in full each month any outstanding balance they have on their card.
Chris Lilly, credit specialist at Finder said: ‘If you spend on a credit card, you’ll have a grace period of around 56 days in which you won’t pay interest on any purchases, providing you repay your balance in full.
‘However, this grace period applies from the start of your billing cycle, so if you buy something just before your statement was generated, you might only get around 26 days’ interest-free.
‘In comparison, Klarna gives you 60 days in which to repay your debt interest-free, while Laybuy and Clearpay both give you 6 weeks.
‘These periods start from whenever you’ve made your purchase, so there’s no billing cycle to worry about.’
As long as shoppers keep up with the scheduled repayments, BNPL can therefore be a great way of financing the purchase of big ticket items.
But this also means that some BNPL shoppers may be at risk of spending beyond their means, which could result in financial difficulties in the future if not managed effectively.
The fact that it is unregulated, is also of concern to some personal finance experts.
‘BNPL can encourage impulse spending so debt can quickly mount,’ added Kilcourse.
‘It is not currently regulated by the FCA. If you have a dispute with the BNPL company, you can’t turn to the Financial Ombudsman for help.’
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