Buy now, pay later loans have become a critical tool for consumers managing everyday expenses. However, persistent concerns remain about the transparency of installment loans and the potential for misuse.
To address these issues, the United Kingdom is instituting regulations that will place BNPL providers under the oversight of the Financial Conduct Authority (FCA). The new framework has four key components. First, customers must have full visibility into the terms of their BNPL agreements, including due dates, interest rates, and late fees.
Second, lenders will be required to conduct affordability checks to ensure borrowers aren’t overextending themselves and can reasonably meet repayment obligations. Third, if a customer experiences financial hardship, lenders must provide support and debt-assistance guidance. Finally, consumers will have the right to escalate complaints to the UK’s Financial Ombudsman Service.
The Preponderance of Debt
The goal of these measures is to foster an ecosystem in which BNPL providers can operate sustainably while customers are protected. One frequently voiced concern is that the rapid growth of installment lending is contributing to a preponderance of “phantom debt.”
Because many unregulated BNPL providers were not required to report lending data to credit bureaus, there has been limited visibility into whether cash-strapped consumers are accumulating unsustainable debt.
In response, some BNPL companies began voluntarily reporting to credit bureaus. Others, however, declined, arguing that the more fluid nature of BNPL loans would not be accurately captured on credit reports.
Not a Breed Apart
BNPL companies have also resisted comparisons to traditional credit products, positioning their services as alternatives to credit cards. Yet emerging data suggests BNPL users are not a breed apart.
Data from LendingTree found that 41% of respondents reporting making a late BNPL payment last year, up from 34% the previous year. The survey also showed that more consumers are using BNPL for routine, everyday purchases.
These trends point to ongoing financial pressure among consumers. Due to these struggles, many credit card issuers have tightened underwriting standards and lowered credit limits. As more consumers turn to BNPL to bridge the gap, concerns about phantom debt—and calls for stricter regulation—are likely to mount.
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