New research by Compare The Market has found that a fifth (20%) of shoppers who used ‘buy now, pay later’ (BNPL) schemes over Christmas will be unable to meet their repayments without borrowing more money.
The average amount spent by BNPL customers during Christmas 2020 was £211, slightly up from £201 in 2019 and the highest average spend was by those aged between 45 and 54, at £277.
More than two-fifths (44%) of UK adults who used a BNPL scheme to fund their Christmas shopping are now concerned about their ability to repay, the survey of more than 2,000 people across he UK found.
On Tuesday, the UK Government announced that BNPL credit agreements will be regulated by the Financial Conduct Authority (FCA) as concerns have been mounting about some consumers taking on unsustainable debts, but it has also been argued that, when used responsibly, such schemes can help prevent people turning to higher-cost forms of credit to finance purchases.
Comparethemarket.com found that 36 per cent of BNPL users saw it as a way to spread the cost of Christmas over a longer timeframe.
However, the findings also suggest that schemes may encourage unnecessary spending, as nearly a third (32%) felt it made them spend more than they usually would and more than two-fifths (44%) bought more extravagant gifts.
James Padmore, head of money, comparethemarket.com said: "When used responsibly, buy now, pay later schemes can be an effective and alternative way to spread out the payments of large purchases.
"It's easy to see why it's popular at a time like Christmas when people may be spending larger sums than usual.
"However, the 'I'll deal with it later' attitude to using this type of financing may mean that some people are now really feeling the strain.
"Our findings show that this has unfortunately caught up with some customers, who are now having to take on more debt to cover the cost of their Christmas spending."
Under the FCA plans, providers will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
The volume of transactions tripled in 2020 as the coronavirus pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers, the UK Government said.
By announcing plans to legislate to bring interest-free BNPL products into regulation, the Government said it is acting swiftly to ensure people can continue to benefit from the products with the right protections.
The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, recommended bringing interest-free buy now pay later into FCA supervision.
John Glen, Economic Secretary to the Treasury, said: "Buy now pay later can be a helpful way to manage your finances but it's important that consumers are protected as these agreements become more popular.
"By stepping in and regulating, we're making sure people are treated fairly and only offered agreements they can afford - the same protections you'd expect with other loans."
The Woolard Review found several potential harms which can be mitigated by bringing these agreements into regulation.
Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer.
Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers - and the review found it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.
With several providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing, the Government said.
Bringing providers under the FCA's regulation means people will be able to take complaints to the Financial Ombudsman Service (FOS) if they are unhappy with the response they get from the firm.
A consultation will take place before legislation is brought forward to ensure the approach to regulating buy now pay later firms is proportionate.
