The Covid-19 pandemic has introduced many trends and rapid growth of numerous industries. Buy Now, Pay Later (BNPL) is one such industry that witnessed tremendous growth in the wake of a pandemic. The closing of small businesses, salary cuts, or layoffs in the corporate sector is a few notable factors responsible for the boom in the BNPL industry. BNPL services are now offered across many e-retailer websites such as clothing, makeup, home products, toys manufacturers, and technology stores with some partner brands, Samsung and PrettyLittleThing. Prominent players in the BNPL space are Klarna, AfterPay, Affirm, Sezzle, PayPal’s Pay in 4, Finflux, Fortunesoft, Splitit, Zip Co Limited, Latitude Financial Services, and others.
The BNPL services offer easy monthly installments to consumers, but consumers need to pay responsibly. Otherwise, it may lead to debt and leave negative remarks on their credit report. The main difference between BNPL and other traditional credit lending services is that BNPL is not regulated. Credit reference agencies cannot view debt accumulated by individuals with BNPL companies, and BNPL companies cannot determine whether a new customer owes money to other BNPL providers. These BNPL providers often conduct soft credit checks, a basic search for customer information on their credit files. Still, it is invisible to other companies, so it does not have any remark or footprint on the credit file.
Most BNPL services display no interest, but BNPL users are often charged interest, late fees, or both. According to an PayNXT360, nearly 45% of BNPL users have missed at least one payment since they started using BNPL services. If a customer fails to pay the monthly payment on time, most BNPL companies will charge late fees that can add up to a significant amount of money over time. When late fees are unpaid for a period, these BNPL companies divert those customers to debt collection agencies who use any necessary action to return the borrowed money. In the future, if any regulation or formal debt collection processes are launched, this could significantly negatively impact customers’ credit reports.
Some customers use credit cards to pay off BNPL installments, which leads to a debt spiral. In the United Kingdom, people used nearly 21.5% of credit cards in 2021 to make BNPL payments. Some customers are paying off their debt in BNPL, which is low interest with high-interest rate credit cards that lead to a debt spiral. PayNXT360 expects BNPL services will be advantageous when users responsibly pay monthly installments on time; otherwise, it may lead to a severe debt crisis.
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