As the cost of living rises and incomes remain obstinately flat1, it is increasingly tempting to spread the cost of goods over a period of months and pay no interest for a fixed period. On the face of it, it may seem the perfect answer to borrow at no cost and be able to pay off the loan in easy to manage chunks.

The benefits are very clear provided you can keep up payments, however the downsides are not so immediately evident, but can become a major problem.

• Missed payments – these can mean paying a fee and then having interest charges imposed on any balance outstanding. Some companies may pass unpaid debts on to debt collection agencies.
• Credit score – Buy Now Pay Later (BNPL) services can refer missed payments to credit agencies. So, if payments are made late or missed altogether, a person’s credit score can be affected, especially if debt collection agencies become involved. In turn, this can lead to difficulties in obtaining mortgages or other forms of credit.2
  

According to a BBC report for Panorama, an estimated 15 million adults of all ages in the UK are actively using this form of credit, an increase of more than two million since the start of the year. Also, research quoted in a report by Equifax suggests about 30% of those are 20- to 30-year-olds.

A sign of the potential problems comes from a Citizens Advice survey of 2,288 people who had used buy now pay later during the past 12 months. It found that while 52% made repayments from their current account, 26% were using a credit card, 9% a bank overdraft and 7% were borrowing from friends and family.



It has been reported that Apple, will soon be adding a BNPL facility to its Apple Wallet for payments through Apple Pay5, and there is growing pressure on BNPL providers to become more transparent with regards to borrowers’ activity, ahead of likely action by the financial regulator to formally regulate the sector. Swedish financial company Klarna, the leading BNPL provider in the UK, started sharing customer data with two credit agencies, Equifax and TransUnion from 1 June, meaning credit card companies will be able to see transactions and debts when conducting formal checks on potential borrowers for mortgages and other finance.6

If you have any outstanding BNPL arrangements and are concerned as to how this may affect you or a mortgage application, we would encourage you to get in touch with us so that we can review your individual needs and circumstances, and help to provide you guidance on what it means for your future plans.

Sources

1 – BBC Business News (2022) What is the UK’s inflation rate and why is the cost of living going up? Available at: https://www.bbc.co.uk/news/business-12196322 (Accessed 28th June 2022)

2 – Experian (2022) How does buy now pay later work?. Available at: https://www.experian.co.uk/consumer/help-discover/discover/guides/buy-now-pay-later.html (Accessed 28th June 2022)

3 – BBC Panorama (2021) Buy Now Pay Later: The New Debt Crisis?. Available at https://www.bbc.co.uk/programmes/m0012jqk (Accessed 28th June 2022)

4 – Citizens Advice (2022) Two Fifths Borrowed to Pay Off Buy Now Pay Later. Available at: https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/ (Accessed 28th June 2022)

5 – Montebello, L. City AM (2022) Hot on Klarna’s Heels: Apple Enters Buy Now Pay Later Space With ‘Apple Pay Later’. Available at: https://www.cityam.com/hot-on-klarnas-heels-apple-enters-buy-now-pay-later-space-with-apple-pay-later/ (Accessed 28th June 2022)

6 – Makortoff, K. (2022) Klarna to start reporting UK customer debts to credit agencies. Available at: https://www.theguardian.com/business/2022/may/04/klarna-to-start-reporting-uk-customer-debts-to-credit-agencies (Accessed 29th June 2022)