Britons part of Generations Y and Z are four times more likely to rely on buy now, pay later (BNPL) schemes to keep up with the country's cost-of-living crisis, according to a study by credit broker Credit Karma.
The research done found that Generation Y and Z use BNPL schemes more frequently than older generations. Baby boomers, those born between 1946 and 1964, trust credit cards more.
Generation Y, more commonly known as millennials, are people born between 1981 and 1996. Generation Z, also known as centennials, refers to people born between 1997 and 2012.
BNPL, a type of short-term financing, allows a shopper to purchase goods through a third-party loan. A person availing the loan, which is interest-free for an initial period, has a choice on how to pay it off. They can either pay in several equal installments, or pay the full amount in one go after a fixed period. Klarna, Clearpay and Afterpay are some of the companies that provide BNPL services.
However, financial analysts are warning against the risks of BNPL services. Unlike applying for a personal loan or credit card, BNPL providers often do not run a credit check on customers. Users with bad credit history could find themselves even more buried with greater debt. (Related: More Americans unable to pay on time as "buy now, pay later" loan scheme becomes popular.)
Financial website This is Money also pointed out that younger people are more likely to struggle with keeping on top of installments. It said 11 percent of Gen Z and 10 percent of millennials admit to falling behind on repayments. Those without a regular income may be unable to pay off the loan, exposing them as well to high-interest payments.
Younger generations bear brunt of financial pressure
Akansha Nath, Credit Karma's U.K. head of partnerships, said their company's findings reflect how young people unfortunately bear the brunt of financial pressure.
East London resident Noah Maury, 23, has been taking out loans with BNPL provider Klarna since he was a university student. While he admits that all his friends also use BNPL services to help manage cash flow, he accepts there are risks in doing so. "It is out of sight, out of mind until you make the payment," Maury said.
"I think it can become quite dangerous if you don't use it correctly and don't have the funds," the 23-year-old continued, disclosing that some of his friends have struggled to make repayments for larger purchases. Fortunately, Maury himself is not in a precarious financial situation.
But BNPL could prove valuable in theory if buyers are disciplined enough to monitor the due date for payments, and ensure they have available cash to pay the loan off without essential spending being affected.
"The first dangerous habit to look out for is using BNPL to pay for everyday goods, such as the weekly shop," said Simon Dukes, chief executive of not-for-profit credit provider Fair for You. "The customer must understand that they can take out more and more and they have to exercise some self-control and awareness about it because they aren't going to get that from the loan provider."
The credit provider offers a food club that loans people money on a special, pre-paid Mastercard which can only be spent at Iceland Foods stores. But it has been created so borrowers cannot rely on it, with a maximum of six times a year usage – predominantly during school holidays. Additionally, new loans are only approved once the previous ones have been paid off.
"These are the sort of safeguards that BNPL will not offer," said Dukes.
"Most providers do charge fees if you don't stick to the repayment schedule, so it is worth checking your agreement before signing up and making sure you have a clear plan to meet the payments," the financial website This Is Money added.
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