In recent times, a new type of interest-free credit known as ‘buy now, pay later’ (BNPL) has transformed the shopping habits of consumers in the UK. This convenient payment option is widely available at online retailers and has gained popularity due to its flexibility in purchasing a wide range of items, from apparel to automobiles.
Retailers are enthusiastic about BNPL as it encourages customers to make purchases beyond their immediate financial capacity, boosting sales. Credit providers also benefit from this arrangement by receiving compensation from retailers for offering such lending services. Despite the positive reception, there are valid concerns associated with BNPL.
Critics argue that BNPL may lead individuals to accumulate unnecessary debt by facilitating impulsive purchases of items they neither desire nor can afford. Some instances have been reported where people with substantial existing debts were granted BNPL credit or had their outstanding balances swiftly transferred to debt collection agencies.
To address these issues, the Financial Conduct Authority (FCA) has announced comprehensive regulations for BNPL, set to come into effect on July 15, 2026. The new rules aim to mitigate the risks associated with BNPL and enhance consumer protection in the industry.
BNPL operates by providing consumers with short-term loans, with or without interest, enabling them to make purchases even if they lack the full upfront payment. Online retailers have actively promoted BNPL credit, with most offering this option during online transactions. There are three primary forms of BNPL arrangements:
1. Limited instalments: This model allows customers to split payments into a set number of interest-free instalments, typically three, enabling them to make immediate purchases despite financial constraints.
2. Try before you buy: Customers have a brief evaluation period, usually 30 days, to assess goods before committing to purchase. However, failure to return items within the specified time frame may result in an automatic purchase.
3. Credit agreements: These agreements involve paying instalments over a longer period with added interest, akin to traditional credit agreements but with relatively lower interest rates compared to credit cards.
Despite the popularity of unregulated BNPL loans, concerns have been raised about individuals accumulating significant debt through this channel. The FCA estimates that approximately 11 million people utilized BNPL credit last year alone, with a notable portion having outstanding balances exceeding £500. Moreover, some consumers have resorted to using BNPL for essential expenses like food and utility bills.
The upcoming regulations will mandate stricter affordability assessments by BNPL providers to prevent customers from overextending financially and accumulating unsustainable debt. By implementing these measures, the FCA anticipates significant financial benefits for consumers in the long run, potentially saving them £1.8 billion over the next decade.
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