Changes to ‘Buy Now Pay Later’ regulations announced but they are unlikely to take effect until 2026. How can you avoid the pitfalls now?
What is BNPL
Buy Now Pay Later (BNPL) agreements are a way to buy goods on credit and pay for them later. This might be through regular interest-free instalments or after an interest-free period. These offer have become very common at high-street shops, but particularly with online retailers. Whilst the consumer does not pay interest the retailer pays a commission to the BNPL provider.
These offers can be a great way of spreading the cost of an item but they are not without their dangers and are currently unregulated. The lack of regulation of BNPL loans results in consumers not being offered the same protection as other forms of borrowing. Citizens Advice have reported that this year so far, they have helped more than double the people they helped in 2022 with a BNPL issue. Most of those are facing difficulties dealing with debt repayments and are falling behind on essential bills or needing emergency support, like food bank vouchers.
Lack of Regulation
Concerns have been raised for sometime about the lack of regulation of Buy Now Pay Later (BNPL) loans resulting in consumers not being offered the same protection as other forms of borrowing. The Treasury has now announced plans to tighten up the rules in a bid to protect consumers.
Proposed rules are likely to include:
- BNPL providers need to be approved by the regulator
- Lenders must ensure loans are affordable
- Advertising and promotion must be fair, clear and not misleading
- Consumers to be able to complain to the Ombudsman
The Government will publish a consultation on draft legislation later this year but changes are unlikely to be implemented until 2024.
Dangers of Unregulated BNPL
Whilst a BNPL loan can be a great way of spreading the costs of an item they are not without their risks. The lender has no requirement to check affordability so it is very easy for an individual to take out several agreements and to quickly become over indebted. People can very quickly become reliant on BNPL as its just a few clicks at checkout and they may then struggle to make the repayments. Citizens Advice research indicted that 2 out of 5 people are repaying a BNPL loan by increasing other debts including overdrafts and credit cards.
With the current lack of regulation the providers advertising, promotion and information may not be clear. Evidence suggests that many people use BNPL without realising how serious it is, that it is credit and that there are consequence. Consequences may include, late payment fees, appointment of debt collectors and impact on credit scores.
Providers do not complete ‘hard credit checks’ so there is no record of the borrowing on an individual credit record this may result in other loan providers being unaware of the true indebtedness.
Safe Use of BNPL
Just Credit Union have put together 7 tips when thinking about using BNPL
- Do you really need the item? Are you only tempted because of the option to pay later?
- Use the 24 hour rule – don’t buy immediately give it 24 hours and then decide
- Make sure you understand the commitment, how much will you repay and when?
- Check the consequences if you miss a repayment
- Make sure you can afford the repayments out of free cash not additional borrowing
- Build in some headroom, can you still afford the repayment as other expenses rise?
- Keep track of all your commitments and ensure you have the full picture
Getting Help
If you are worried about debt, speak to your lender as soon as possible – they may be able to help. There are also many sources of free impartial advice we have provide a list HERE
