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Buy now, pay later outpaces ‘traditional’ debts such as mortgages or car loans

More Britons have borrowed through buy now, pay later services since the start of 2021 than have taken out traditional debts such as bank loans or mortgages,  according to new research.

Ten per cent of adults had used BNPL, while 6 per cent had taken out a mortgage, 3 per cent had taken a bank loan and 2 per cent had used an authorised, interest-charging overdraft, according to research by loan provider Creditspring. 

Despite their rising popularity, around a third of adults were unaware that BNPL schemes were a form of borrowing.

BNPL schemes are third-party services such as Klarna, Afterpay and ClearPay, which appear at online checkouts and give the buyer the option to split their payment into installments.

One in four young adults have used a BNPL scheme in the last 15 months, with debt charities warning consumers of the dangers of borrowing more than you can afford to pay back

While many offer interest-free options, interest can be charged on higher-value items or longer borrowing terms. 

Fees are usually charged if the borrower repays late, and their details can ultimately be passed to debt collectors. 

Despite this, Creditspring’s survey found that one in seven adults thought it was ‘impossible’ to get into debt using BNPL, rising to one in four among under-35s. 

Younger adults are among the most frequent users, with one in five having used the delayed payment schemes in the last 15 months.

These misconceptions could mean that millions of UK borrowers are at risk of hurting their credit reports or unwittingly getting into debt.

Debt charity Stepchange and Citizens Advice have warned that the cost of living crisis could increase reliance on BNPL during 2022. 

Richard Lane, director of external affairs at StepChange, said: ‘Due to the way BNPL services are marketed at checkouts, younger consumers – who tend to be less financially experienced – often do not realise they are taking on credit at all. 

‘These services are presented as a convenient way to shop and don’t give individuals the chance to stop and think about the consequences of taking on credit and the financial difficulties that may arise later. 

 ‘For someone considering using BNPL, keep in mind that even though it may be interest-free, it is still borrowing, and will need to be paid back. 

‘It’s important to recognise that BNPL is like any other debt, and you should never borrow more than you can afford.’ 

Four out of five adults are said to be unaware that BNPL schemes aren’t regulated in the UK, while half didn’t know that a person could be referred to a debt collector for missing a BNPL payment, according to Creditspring. 

An additional 43 per cent said they didn’t know that BNPL providers could add a late payment fee. 

Around one in four adults under 35 believed they wouldn’t be able to get into ‘serious’ debt using the services, which Citizens Advice said was a worrying mindset.

Matthew Upton, director of policy at Citizens Advice, said: ‘Buy Now Pay Later borrowing can be like quicksand – easy to slip into and very difficult to get out of.

‘Our real fear is people don’t understand what they are signing up to, or the consequences if things go wrong. The Government needs to urgently push on with regulating the BNPL sector.’    

Debt charities are urging customers who use BNPL to understand the risks of borrowing

Debt charities are urging customers who use BNPL to understand the risks of borrowing

According to the FCA, there were £2.7billion worth of BNPL transactions in 2020, with research suggesting the market more than doubled to £5.7billion last year.  

Last year, the Government announced a consultation on the regulation of the BNPL industry, but this is yet to be implemented.

Neil Kadagathur, co-founder and chief executive of Creditspring, said: ‘Ever since payday loans have been driven out of the mainstream, BNPL has been viewed as the new wild west of the borrowing industry.

‘Regulation is welcome but the misconceptions amongst borrowers, that BNPL is risk-free or isn’t a form of borrowing that can lead to debt, are a much bigger issue.  

‘Borrowers must be protected – currently, they are in real danger of falling into another credit trap as they continue to rely on BNPL as a crutch to struggle through until payday. 

BNPL services have been used more than regular lenders, including loans, mortgages and car finance, since January 2021

BNPL services have been used more than regular lenders, including loans, mortgages and car finance, since January 2021

‘The worst-case scenario is that borrowers can end up receiving a knock on the door from a debt collector, but currently the vast majority are completely unaware this is even a possibility.’ 

He also said that, as it was currently easier to access BNPL than to qualify for a credit card, those in precarious financial situations could be most at risk.  

Kadagathur added: ‘Financial education is vital and more support is required to reach those who need affordable credit. 

‘Currently, there are up to 15m people in the UK who struggle to access mainstream credit options – these are the individuals who are most at risk from predatory high-cost lenders, especially in the current climate.’