On 15 July, buy now pay later (BNPL) services, including those from the likes of Klarna and Clearpay, have been brought into the regulatory remit of the Financial Conduct Authority (FCA), just as banks, mortgage lenders, credit card providers, and personal loan companies are.
According to the FCA, around one in five UK adults uses BNPL.
If you’re among them, you need to know what is changing and how it affects you.
BNPL is changing in several key ways
BNPL lenders now must be authorised by the FCA. So, when you borrow from an authorised lender, you’ll know they meet the required standards, which gives you more peace of mind.
You’ll receive clear information every time you borrow, which will cover details like when your payments are due, how much they are and what happens if you miss them.
You’ll get Section 75 protection on purchases of more than £100 (up to £30,000). This means that if there’s something wrong with the item you’ve bought, the lender shares responsibility with the seller. You’ll be able to request a chargeback.
You’ll have to pass an affordability check each time you make a purchase. In certain cases, that might mean people are refused credit – but the checks will be proportional to the borrowing amount, so small transactions are unlikely to be declined.
If you’re in financial difficulty, you’ll be able to ask your BNPL lender for support, and they’ll be obligated to offer help.
If you complain to your BNPL provider and you’re not happy with their response, you can now escalate it to the Financial Ombudsman Service (FOS). They’ll make an impartial judgement on if and how the issue should be addressed.
These changes don’t make BNPL risk-free
Because BNPL is easy and interest-free if you pay on time, it can feel like a no-brainer. But this form of borrowing still comes with a set of risks and drawbacks:
- BNPL is mostly used for discretionary purchases like clothing and electronics. Taking on debt for non-essentials you can’t currently pay for is likely to worsen, not improve, your financial position
- Many people don’t think of BNPL agreements as loans, although that’s exactly what they are, so they give them less consideration than other debt
- Because BNPL is designed to be frictionless, it’s easy to lose track of the number of loans you’ve taken out and how much they come to in total
- If you have several agreements running at the same time, it can be difficult to remember and manage the different repayment dates
- You might even end up using another form of credit, like a credit card, to meet the payments. Then, you might have to pay interest, and your debt can snowball
In some ways, the recent change in regulation gives you more protection when you borrow, but you should still give it serious thought before entering an agreement.
Critics are also pointing out Section 75 protection isn’t necessarily automatic - it depends “whether the lender happens to be a different business from the merchant”, says Scott Dawson, CEO of payments firm DECTA, as well as the date that their agreement began.
Make sure you’re borrowing responsibly
BNPL can be a useful way to manage your cash flow without incurring interest, if you use it occasionally and responsibly.
If you’re paying with it regularly, here are a few tips to make sure your usage is under control:
- Treat it as seriously as any other debt . Before using it to pay, ask yourself if you would still buy that item if you’d need to fill out a loan application
- Lenders are now required to give you clear information – make sure you read and understand it. Different lenders have different terms
- Set yourself a limit for how many BNPL agreements you can juggle at the same time. Before starting a new agreement, do a quick check to see how many you have already
- Set up a system to keep track of your payment dates, like setting reminders in your phone
- Repay from a current account, rather than a credit card or overdraft, to avoid incurring interest and falling into bad habits
Remember, there are other ways to pay that you might find easier to manage, such as a 0 per cent credit card, if you’re eligible. Another alternative is to simply save up for any new purchase rather than taking on debt.
Finally, if you find you’ve gone too far and can’t make your repayments, you can now contact your lender for support, so don’t hesitate to. You can also get free debt advice from National Debtline and other organisations.
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