Almost half of people using “buy now, pay later” at the checkout are struggling to keep up with household bills, according to a study that raises questions about lending practices and affordability checks of companies such as Klarna.
The YouGov survey of a representative sample of more than 5,000 adults exposes the scale of the financial difficulties many people are experiencing over Christmas.
The research, commissioned by the debt charity StepChange, suggests that one in ten adults — equivalent to 5.2 million people — currently hold one or more “buy now, pay later” products. The study also found that nearly one in every three of these borrowers have two or more outstanding loans.
The real numbers are likely to be significantly higher because the research was conducted in October before most people did their Christmas shopping.
The StepChange study follows research by Citizens Advice over the summer that found one in ten “buy now, pay later” shoppers have been chased by debt collectors, rising to one in eight young people.
The loans allow customers to pay for goods in instalments using interest-free credit. The provider funds the loan through fees from retailers, who sign up as they generate more sales from customers.
Klarna is by far the biggest provider in the UK. The Swedish company says that more than 13 million Britons have used its service at least once.
Supporters of the loans say they are positive for consumers because they generally work out cheaper than credit cards and give online shoppers the chance to try goods such as clothes at home before paying for them. If the products bought with the loans are returned to the retailer, the customer is not charged.
However, critics say that lending at the checkout increases indebtedness, particularly among younger people, by encouraging them to spend more.
Phil Andrew, chief executive of StepChange, said: “We remain concerned about the harm buy now, pay later products can cause. Shoppers are too often sped through checkout, giving them little time to engage with the detail of the credit they’re taking on, while some don’t even realise they are taking on a credit product at all.
“Our research shows a significant number of people using these products find it difficult to keep up with their monthly household bills. Taking on more credit, even interest-free credit, often makes financial problems worse.”
This year the government said that “buy now, pay later” lenders should be regulated by the Financial Conduct Authority. The Treasury is currently consulting on how this should be done although the new rules might not actually be in place before 2023.
StepChange is calling on ministers to ensure the new rules enforce proper affordability checks.
Andrew said: “The government has recognised the urgent need to regulate these products. It is essential that the consultation results in a strong regulatory framework that ensures these lenders do not cause harm for their users. This means effective affordability checks, clearer explanations and more time for consumers to make an informed choice before signing up, and fair treatment where financial difficulties arise.”
“Buy now, pay later” lenders point to other research that appears to contradict the StepChange study. Klarna highlighted research by a management consultancy firm that found three quarters of consumers say they can easily afford “buy now, pay later” loans while only one in 16 borrowers had missed a repayment.
Innovate Finance, which represents the industry, says that it “strongly supports” regulation that “protects consumers, builds trust and supports continued innovation”. Adam Jackson, of the trade group, said: “Regulation should include requirements for clear consumer information, protection when things go wrong, and ways of identifying and supporting consumers who have less financial resilience and may be at risk of unaffordable debt.”
Jackson also called on the credit ratings agencies to change. He said: “In its current form, some consumers may be unfairly excluded from credit which they can afford, particularly those with ‘thin files’, and credit providers cannot access proportionate credit risk checks for more frequent small purchases like ‘buy now, pay later’.
“We need credit ratings agencies to work with providers to develop new categories that will work for this market; providers to agree how they will share credit information; and further development of innovative affordability assessment solutions based on open banking.”
Case study
Chloe Porter, 25, a nursery worker from Birmingham, says she started using credit when she was a teenager and still living with her parents.
“I didn’t have many outgoings at the time, so I got into a habit of spending the money I had from my job,” she said. “I remember being bombarded with credit card and ‘buy now, pay later’ offers, which seemed like a good option as I had the income to pay them off and I didn’t have any bad credit. But things escalated and I soon found myself with bills at around £400-£500 at the end of each month.”
She says Klarna started appearing on “pretty much every online checkout” she used and things snowballed.
“I would buy a new outfit and shoes for nights out — it was easy to go overboard. By this time I had moved out of my parents’ house and was trying to juggle my credit commitments with paying for essentials like rent, bills and food. I was finding it increasingly difficult to manage my money and I quickly got overwhelmed.”
After missing a Klarna repayment, Chloe started getting text messages, emails and letters from the company. Before long, it had appointed a debt collector to chase for payment. But despite doing this, she says Klarna continued to allow her to take out more debt.
She said: “I had outstanding payments for things that I’d bought and hadn’t paid for but they still allowed me to make purchases, which makes no sense. As an adult now, looking back, surely if someone already owes you money, that should be that really.”
Eventually Chloe approached StepChange and went on to a repayment plan. So far she has managed to reduce her debts from £5,000 to £3,000.
She said: “I’m really happy about that. It’s not been the easiest process as I’m on a zero hours contract with the nursery but StepChange have been really helpful when I’ve had to adjust my plan to allow for essential purchases for my daughter, who is now one year old. My mental health is a lot better too, which is a big help.”
She added: “I think ‘buy now, pay later’ products are far too easy to use, and there’s not enough checks in place to allow for people whose circumstances change or who can’t afford the repayments. It would be good to see improvements made so that others like me don’t fall into the same trap in the future.”
Klarna says that it refers fewer than 1 per cent of transactions to debt collection agencies and that borrowers should not be able to use its service if they have been referred.
In a statement, it added: “We check someone’s ability to repay on each purchase, have spending limits, and we restrict our services after missed payments, keeping people out of debt. As a last resort we use debt collection agencies who do not use bailiffs to help us contact customers we are unable to reach after a period of time and no fees are added.”
