More Consumers Taking on New Type of Debt, Calls for Regulation Get Louder

There is a new category of debt that emerging, digital-first collection agencies are seeing more of, and it appears this type of debt is going to become even more prevalent in the years to come, according to a recently published report.

Known as “Buy Now, Pay Later,” this type of credit is being made available by more fintech and online lenders, usually for purchases that are made via the Internet. Typically, BNPL loans are paid off in three or four installments. You may have noticed this option when making purchases online, using services like Afterpay, Klarna, and Affirm. Sixty percent of consumers who responded to a survey have indicated they have used a BNPL service during the pandemic, showing how popular and ubiquitous the option is becoming. But, for those lenders, there is the problem of what happens when the consumers don’t make their BNPL payments.

One in 10 BNPL customers have had a debt placed with a collection agency and 96% of those customers have experienced a “negative” consequence such as sleeplessness, deteriorating mental health, ignoring text messages, emails, and letters, and borrowing funds to repay their debts. Those individuals who used a Buy Now Pay Later service paid $54 million in late fees in the past year.

The issue, according to the study, is that consumers are not proactively informed that their debts will be placed with a collection agency if they are not repaid. Calling it “under-the-radar debt,” the group that published the study is calling for BNPL to be more regulated in order to protect consumers.

“The sheer number of shoppers facing debt collection is startling,” said Dame Clare Moriarty, the Chief Executive of Citizens Advice, which published the study. “We know from our frontline advisors just how much stress this can cause. A seamless Buy Now Pay Later checkout process should not mean shoppers have to dig around in the small print to find out they’re taking out a credit agreement, and could be referred to debt collectors if they can’t pay. The warnings should be unmissable.”

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