The Treasury has laid out plans to more tightly regulate ‘Buy Now Pay Later’ loans, amidst concerns that these products are landing customers in debt.

The changes, which will apply to other forms of short-term debt as well, are designed to raise consumer awareness around these loans and offer increased protection from irresponsible lending practices.

So-called ‘BNPL’ schemes have become popular in recent months, as they allow customers to spread out a payment if they can’t afford it upfront. Last year, over 5m people used these schemes to buy over £2.7 billion worth of goods.

However, these products have so far been relatively unregulated, and borrowers lack the kinds of protections that they usually would benefit from when taking out a loan. Not only this, but there are concerns that the advertising for these products is not always completely transparent, and borrowers aren’t always fully aware of what they’re signing up for.

With the cost of living surging in the UK and many struggling financially, the government’s planned changes have been positively received, though there is concern that they are not acting quickly enough.

How do ‘Buy Now Pay Later’ schemes work?

BNPL schemes allow customers to buy a given product and defer paying for it, either repaying the outstanding amount in instalments or all at once at a later date.

These types of loans are interest-free, which makes them particularly tempting, as you only pay the cost of the item itself, and nothing on top. However, missing a repayment usually results in late payment charges and damages your credit score, making it hard to apply for a mortgage or other forms of borrowing.

It is also argued that BNPL schemes tempt customers into buying items they can’t afford, spending money that they wouldn’t otherwise and landing them in financial trouble. This is why the model has become so popular among retailers in recent months, who offer the schemes to customers via lenders like Klarna and ClearPay.

Rocio Concha, Director of Policy and Advocacy at Which?, said: “Using Buy Now Pay Later is an easy and convenient way to pay for millions. However, with currently little to no information or warnings about the risks of incurring late fees or getting into debt, it raises concerns that many shoppers do not fully understand the products they’re using.”

This problem is made worse by the fact that lenders are currently not required to subject BNPL customers to credit checks, which are normally standard procedure when you apply for a loan or credit card. This means that customers with histories of missed repayments and debt problems usually have nothing stopping them from using these schemes.

Caroline Siarkiewicz, Chief Executive of the Money and Pensions Service, said: “Research from our Debt Need Survey, which measures how many people need debt advice in the UK, has shown that four in ten people who had used Buy Now Pay Later products in the last six months are in need of full debt advice. A further third are at risk of falling into problem debt, and only a quarter of those demonstrated that BNPL is appropriate in line with their financial commitments.”

Read more about these products in our article How do ‘Buy Now Pay Later’ schemes work?

What changes are the government introducing?

The changes laid out by the Treasury are designed to bring the rules for Buy Now Pay Later products in line with other kinds of loans and increase consumer protections.

Lenders will need approval from the Financial Conduct Authority (FCA) in order to offer Buy Now Pay Later loans in the first place. They will also need to perform affordability checks on potential customers to make sure that they will actually be able to pay off the loan and not spiral into debt.

Customers will be able to take complaints to the Financial Ombudsman if they feel they have been treated unfairly. The Ombudsman is an official body that can investigate financial issues for you and seek to resolve them with the company in question.

Lenders will also have to make sure that their advertising is “fair, clear and not misleading”, so that customers will have enough knowledge to make an informed choice.

Economic Secretary to the Treasury, John Glen said: “Buy Now Pay Later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.

“By holding Buy Now Pay Later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

The proposed changes have been received well by financial experts, mixed with concerns over the fact that the changes announced by the Treasury are not set to be implemented until mid-2023. Martin Lewis, founder of (MSE) said: “Buy Now Pay Later regulation is desperately needed, so my pleasure that it’s finally to happen is tempered by frustration at how long it is taking … [These] protections still won’t be in place for the financially bleak winter coming.

“Debt shouldn’t be something you slip into, it must be an informed, active, conscientious choice. While in some cases BNPL can be a legitimately cheap way to spread the cost, amidst a cost of living crisis, people should always first ask themselves: ‘if I can’t afford to pay for it now, how will I afford to pay for it next month?”

If you’re struggling with debt

If you’re in debt and aren’t able to pay back what you owe, it’s vital that you seek help as soon as possible. Contact your lenders and let them know you’re struggling to make your repayments – they might be able to arrange a more affordable repayment plan with you.

For more information you can read our guides on tried and tested ways to cut costs or ideas to help with budgeting if you’ve suffered a fall in income.

If you need further help, get in touch with one of the charities specialising in free debt advice. These include StepChange, National Debtline and the Debt Advice Foundation. You can find out more about your options if you’re in serious debt here.

The most important thing is that you seek help as soon as you can, to avoid problems building up and to enable you to take back control.