UK shoppers have racked up more than £4bn in outstanding debt so far this year after taking advantage of “buy now, pay later” deals during the pandemic, according to a new study.
An estimated 7.7 million Britons have accumulated “significant” outstanding balances with buy now, pay later (BNPL) companies averaging £538 for each user, according to Credit Karma, a financial website that offers people access to their credit score and credit report.
The findings come days after the government announced that tighter regulation of the multibillion-pound BNPL industry was on the way amid concern among regulators and politicians about how easy it is for consumers to buy more than they can afford and potentially build up sizeable debts.
Responding to the new data, the consumer organisation Which? said its own research showed that shoppers were being “bombarded” with BNPL offers at retailers’ online checkouts, “so it’s very concerning to see such a huge amount of debt related to these schemes”.
This form of unregulated interest-free credit has undergone explosive growth recently, particularly among under-30s and those with tight finances who have welcomed the ability to delay payment for goods.
A growing number of companies such as Klarna, Clearpay and Laybuy allow customers to stagger payments for products such as clothes, footwear, beauty items and furniture with no interest or charges, provided they pay what they owe on time.
Invitations to buy now and pay in three monthly or six weekly instalments are omnipresent at the checkouts of hundreds of online retailers including Asos, H&M, Boohoo and JD Sports.
In the UK, the use of BNPL nearly quadrupled in 2020, hitting £2.7bn in transactions, according to official data. Between the start of the pandemic and the end of last year, 5 million people used a BNPL product, a Financial Conduct Authority survey found.
Credit Karma said BNPL had continued enjoying rapid growth, and that there were now an estimated 11.6 million active UK users.
The credit report provider said it was urging caution when it came to such services, adding that they could contribute to “an opaque debt bubble”.
While until now the focus of BNPL deals has mainly been on fashion and beauty purchases, and the average amounts borrowed are often relatively small – £65 to £75 for each transaction, according to the FCA earlier this year – BNPL providers are increasingly partnering up with higher-value retailers selling everything from vacuum cleaners and electric guitars to garden furniture and mattresses.
By the start of October, the Credit Karma study estimates, Britons had spent £5.79bn using BNPL this year, with £4.1bn of this still outstanding to pay.
Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
Those falling behind with their payments were experiencing more than just debt, said the website. Some had seen their credit score drop as a result, while others believed they had been rejected for a mortgage or other borrowing after missing repayments. “The issue is set to worsen as Christmas approaches,” it added.
Klarna indicated it did not recognise some of the data. “Our average outstanding balance is £48, and we restrict the use of our services if a payment is missed to stop debt building up,” said a spokesperson.
In February it was announced that BNPL would be regulated by the FCA, though it could be well into 2022 or 2023 before the rules take effect.
In response to some of the concerns that have been voiced, the Treasury said last week that “there is relatively limited evidence of widespread consumer detriment materialising at this stage”.
