The Salary Calculator

Buy Now, Pay Later: How Does it Work and What’s Changing?

by Madaline Dunn

Buy Now, Pay Later (BNPL) use has surged in recent years. From fridges and fashion to air fryers and furniture, more and more people are choosing BNPL payment plans to foot the bill — including for their summer holidays, according to information and insights company TransUnion.

A recent Loqbox report shared similar findings: among parents, BNPL use for summer travel now sits at 8.4%. This reflects a shift from 2024, it said, when such products were used as “back-up options.”

But consumers aren’t just using BNPL for big-ticket items. Research from the credit-building business revealed that, in the UK, one in 10 are now using BNPL to cover basics like food and fuel. 

And BNPL is not without risk. Unlike other types of credit, BNPL has remained unregulated, with debt charities and consumer experts alike sounding the alarm.

However, regulation to tame this “wild west” is on the horizon. Amidst these upcoming changes, this week at The Salary Calculator, we’ll walk you through: 

• What is Buy Now, Pay Later
• What’s driving BNPL use?
• What risks are associated with BNPL 
• What regulatory changes are incoming? 
• How can consumers protect themselves against unmanageable debt? 

What is Buy Now, Pay Later?

The BNPL market has quadrupled in size since 2020, and in the year to 2024, nearly 11 million people used these kinds of products, up from 8.8 million in 2022.

While BNPL has seen a recent growth in popularity, this kind of short-term financing — which enables shoppers to spread the cost of a purchase across a few weeks or months — has been around for over a decade.

And although BNPL is typically an interest-free form of credit, it’s still a loan.

When consumers use products from companies like Klarna or Clearpay, they’re agreeing to pay back the full cost and any late charges for missed payments. 

What’s Driving BNPL Use? 

For consumers, BNPL products can appear more accessible and convenient than traditional forms of credit. 

Indeed, BNPL offers are increasingly advertised at checkout. There are now over 20,000 merchants offering BNPL — both online and in-person — and that number is only growing. 

Likewise, some of these financial loans only require a soft credit check that’s not visible to other credit providers, which can make BNPL an appealing option for those without a strong credit history. 

And with the cost of living remaining high, the perceived affordability of this kind of credit among consumers is also a key driver in its growth, research shows.

“There is a crossover between BNPL use and people struggling with their finances”

Beyond this, some research has suggested that BNPL’s success is rooted in its “effective” use of artificial intelligence (AI) and algorithms.

So, who’s using these products the most? 

Research from Finder showed that BNPL is now most popular among Millennials, with 60% using such products “at some point,” followed by Gen Z (56%).

A number of factors underpin this trend, from a wariness of traditional credit and credit card approval challenges to a dissatisfaction with traditional banking services.

BNPL use is also high among those living in the most deprived areas of the UK and those with low financial resilience, according to the Financial Conduct Authority’s (FCA) recent Financial Lives report.

“Our research has suggested there is a crossover between BNPL use and people struggling with their finances,” said Simon Trevethick, head of communications at StepChange Debt Charity, adding, “Previous polling found that those who use BNPL are twice as likely as the general population to need to use credit to cover essential bills.”

This is corroborated by findings from the Money and Pensions Service, which revealed that 38% of BNPL users need “full debt advice,” and 35% are “at risk of needing debt advice.”

What risks are associated with BNPL?

While BNPL can appear an attractive option, it’s not “free credit” and carries with it potential risks.

Despite this, research points to a lack of consumer awareness regarding the costs of BNPL.

 “It’s a form of credit—and should be treated with the same caution”

In a study conducted for the Lending Standards Board (LSB) by RFI Global, only 52% of BNPL users reported being aware of late payment fees, while 50% were unaware of potential fees before incurring them.

Similarly, research from the Behavioural Insights Team (BTI) found that, of those surveyed, four in ten were unaware that they could be approved for BNPL “even if they could not afford it.”

“Consumers often fall into the trap of treating BNPL like an extension of their disposable income,” said Matt Dronfield, the managing director of Debt Free Advice. “In reality, it’s a form of credit—and should be treated with the same caution.”

Debt Free Advice added that BNPL can make things “seem affordable when they’re not,” encouraging impulse buying and overspending.

Indeed, one piece of research found that BNPL users spend 6.42% more than those who do not. Meanwhile, data from the BIT showed that 38% of those surveyed had “spent more than they planned because BNPL was available.”

Debt Free Advice also noted that because BNPL companies all work differently, it’s easy to lose track of what is owed, and consumers can end up borrowing more than they can afford.

In 2024, Finder’s survey found that in the last 12 months, 53% of those who had used BNPL had been charged late fees. 

And because companies often take payments straight from the consumer’s card, if the first try fails, they can try again. This can bring people into their overdrafts or result in insufficient funds for essential bills, said Debt Free Advice.

What regulatory changes are incoming? 

Efforts to regulate BNPL have been in the works for some time, and in July, it was announced that from July 2026, BNPL will be subject to the same protections as other forms of credit. 

Debt Free Advice explained that the new rules will require BNPL firms to review whether consumers can afford payments, while also clearly explaining their terms.

The regulations mean that customers will have faster access to refunds and the right to complain to the Financial Ombudsman to ensure complaints are dealt with fairly. 

“Regulation will help make these services safer and more transparent”

The changes will also reduce what Trevethick called “excessive” marketing at checkout and provide consumers with “additional protections at a time when they are most needed, as cost of living pressures remain.”

Indeed, Debt Free Advice noted that linking BNPL to credit agencies can help “stop people from borrowing too much or harming their credit score without realising.”

That said, it shared concerns about how strong the new rules will be during the changeover, adding that lenders should do more, including by pointing people to free debt help early, before “problems get worse.”

“We’ve seen a sharp increase in clients coming to us with BNPL-related debt. Regulation will help make these services safer and more transparent—but education is still key,” said Dronfield.

How can consumers protect themselves against unmanageable debt? 

With a year until the BNPL regulations come into place, debt charities warn that users need to ensure that they’re using products safely and sustainably. This includes changing the way that consumers approach this kind of credit.

“If you wouldn’t use a credit card for the purchase, reconsider BNPL,” said Debt Free Advice. 

Likewise, it’s important to assess whether BNPL is an affordable option.

“While it’s an interest-free product, if you miss a payment then you can still get struck with late fees, so it is essential to make sure that any BNPL repayments will be affordable before using the product,” said Trevethick. 

Once taking on BNPL, Debt Free Advice said it’s key to track, budget, and plan. This means keeping careful watch of all your BNPL commitments, how much you owe and the due dates for each to “avoid accumulating debt.” 

Keeping to one provider can also help users avoid stacking multiple purchases, the charity said. 

Trevethick echoed this: “At StepChange, we have seen clients with multiple BNPL debts across different providers.”

Debt Free Advice also warned against relying on BNPL for necessities: “It’s a sign you may need debt advice.” 

And, if you’re struggling with repayments, contact a free, impartial debt advice service:

• Debt Free Advice
• StepChange 
• Citizens Advice 
• National Debtline 

 

Tags: BNPL, Buy Now, Loans, Pay Later