Nearly half of people aged between 18 and 34 don’t know that buy now, pay later lenders can add fees for missed payments, research claims.
Some 46 per cent of young people said they were unaware that they could get into debt by using BNPL products, compared with 35 per cent on average.
The study by lender Creditspring also revealed that BNPL products are now the second most common form of borrowing among the younger generation.
Borrowing: Buy now, pay later products allow users to split payments into instalments, but can see them rack up debt
While credit cards are still the most popular form of borrowing for young adults, with 19 per cent taking out these products, 15 per cent of 18 to 34 year-olds said they had taken out BNPL products for the first time since August last year.
This compares with 13 per cent of 35 to 54 year-olds, while among those over 55, only four per cent had started to use these products in the last six months.
Young people are by far the biggest users of BNPL services, with 36 per cent of 18 to 34-year-olds already using these products at least once a month, compared with just 20 per cent of 35 to 54-year-olds.
Neil Kadagathur, Creditspring chief executive and co-founder said: ‘The UK is sitting on a ticking BNPL timebomb – millions of young people are unknowingly putting their financial future at risk by piling up BNPL debt.
‘There is a huge knowledge gap when it comes to BNPL – this is driven by lenders who continue to offer a lack of transparency, confusing repayment terms and hidden costs. BNPL lenders need to step up and take responsibility for tackling the misconceptions that still exist about the risks of using these products,’ Kadagathur said.
Buy now, pay later products allow users to take out a loan for a specific purchase, which is then paid back in instalments. Often, these products offer an interest-free loan for an initial period.
However, these products are unregulated, and providers generally don’t run credit checks on users, meaning that those who are already financially vulnerable can find themselves racking up even more debt due to the high interest they are charged if they don’t pay the money back on time.
The lack of regulation of these products also means that users cannot complain to the Financial Ombudsman with their concerns, something which a massive 88 per cent of young people do not realise.
A fifth of young people, meanwhile, don’t know that BNPL is completely unregulated.
With the onset of the Covid pandemic and the cost of living crisis, BNPL has become an increasingly popular option, especially among younger generations, with products such as Klarna and Clearpay leading the industry.
In many cases though, those using these products are not aware that they are borrowing money in a similar way to using a credit card.
Only 37 per cent of young people say they can meet their BNPL debts without issue, compared with 60 per cent of those between 35 and 54.
Debt charity StepChange has warned that those with BNPL debts are three times as likely to be in problem debt compared with the average UK adult.
StepChange head of communications Simon Trevethick said: ‘Our research reveals a worrying crossover between use of BNPL and financial hardship, but also that BNPL use is becoming much more common.
‘With living costs stretching household budgets, there’s a concern that people are relying on credit like BNPL to make ends meet, which presents as more of a risk as it’s not regulated in the same way as other types of consumer credit.
‘With BNPL remaining unregulated, there’s a lack of consistency across the sector, meaning affordability checks can be patchy, as can consumer understanding.
‘Younger people who may have less financial experience can be more vulnerable to falling into problem debt after using BNPL – especially as at checkouts it’s not always clear that BNPL is a form of borrowing.’
Kadagathur added: ‘Regulation of BNPL is absolutely essential, and can’t come soon enough.
‘Plans to bring the BNPL market to heel have been delayed for far too long, which has led to increased confusion and ultimately punished borrowers. The regulator needs to push through this much-needed legislation as a priority.’
