Why Buy Now, Pay Later could be coming at too high a price

Since the beginning of this month, shoppers who pay using Klarna’s buy now, pay later service will see their data shared with credit referencing agencies TransUnion and Experian. It means that any missed or late repayments to Klarna after that date could affect borrowers’ ability to get a mortgage, credit card or personal loan.

On the flipside, shoppers who use any of Klarna’s payment options and keep on top of their instalments should see their credit files improve as Experian and TransUnion begin to track users’ settled payments, balance of payments still to be made, monthly payment amount and missed and late payments.

The move was announced earlier this month and comes ahead of an expected regulatory crackdown on buy now, pay later lenders later this year. Alex Marsh, Klarna’s UK chief executive, said he hoped it would ‘support wider efforts to drive better visibility of consumer borrowing’.

Buy now, pay later offers shoppers the option to pay for items in monthly instalments without paying any interest. Different providers offer different terms and conditions, however, with some able to slap high default charges on borrowers who fail to make an instalment.

The sector has been criticised by the UK financial watchdog for also enabling customers to borrow money for short periods of time without it being clear to other banks and credit providers how indebted they really are – particularly if they use more than one buy now pay later service.

Because users don’t undergo a credit check before using buy now, pay later, it’s also easy for customers to pile payments up for the future without assessing whether they’re affordable.

Following a formal review published by the Financial Conduct Authority last year which found buy now, pay later products ‘can be useful but they can also be harmful if used poorly’ the regulator is due to announce crackdown plans later this year.

Klarna’s move to share customer data was in direct response to the FCA’s recommendation that buy now, pay later lenders act to improve transparency before regulations come into force, said Marsh.

‘This was a key area of concern highlighted in the FCA’s Woolard Review and we very much took to heart the advice at the time,’ he added. Figures from comparison site Finder show a rapid rise in the use of buy now, pay later, particularly among younger shoppers.

In early 2021, the number of online purchases made using buy now, pay later services from Klarna, Clearpay, Laybuy and others was growing at 39% a year. The FCA recorded more than £2.7 billion spent by UK shoppers using buy now, pay later at the start of 2021.

More recent data from Equifax showed 28% of the UK’s adult population made at least one buy now, pay later purchase in October last year. The agency said this meant 2.6 million more people were using the payment method than had been at the start of the year.

While its popularity is evident, buy now, pay later has been criticised as a payment method for some goods and services. In early 2022 Zilch began offering the payment option for supermarkets and takeaways and in May confirmed energy customers would have the option to pay monthly bills in four instalments over six weeks.

Facebook-based advice service Energy Support And Advice UK told the Financial Times that customers concerned about paying soaring energy bills should treat buy now pay later offers with ‘extreme caution’.

A survey by Creditspring carried out in April this year found one in three UK adults didn’t realise buy now, pay later was a form of debt while half had no idea that late payments could be referred to debt collection agencies.

Sue Anderson from StepChange Debt Charity warned piecemeal data sharing by some buy now, pay later providers and not others ‘will not solve the intrinsic problems at the heart of these services’.

She said including repayment information on customers’ credit reports would actually increase the risk for consumers because it has the potential to curb their ability to borrow elsewhere.

‘We already know that use of buy now, pay later has significant crossover with financial difficulty – our own research suggests that around a quarter of users are having to turn to borrowing just to keep up with their essential costs,’ she added.

Mortgage broker L&C Mortgages’ David Hollingworth said to begin with, more transparency on borrowers using buy now, pay later would give mortgage lenders a clearer picture. But, he pointed out, given lenders already require bank statements from anyone applying for a mortgage they are already aware of how much someone spends on these services.

‘Of course, it will also give lenders more clarity on where users have fallen behind on buy now, pay later payments, which could clearly have an impact on the mortgage lender’s decision to lend,’ he added.

Personal finance expert Andrew Hagger said: ‘Lenders will expect borrowers to prove they can manage their buy now pay later commitments in the same way as credit card and loan debt.

‘The big difference is that some consumers will have multiple payments coming out of their account throughout the month, compared with a single monthly loan or credit card repayment. Users may suddenly start to be turned down if prospective lenders feel they are taking on too much credit. Of course, it will also give lenders more clarity on where users have fallen behind’

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