Almost 8 million Brits who have used 'buy now pay later' (BNPL) services to shop have outstanding balances that average £538 ($740) each — totalling £4.14bn across the UK.
Research by Credit Karma found that almost half (48%) of BNPL purchases are made on nonessential items, such as electronics, cosmetics or holidays and 31% of Brits intend to increase their use of the service as the holiday season approaches.
But BNPL debt could be impacting consumers' credit score and ability to get a mortgage.
“Buy now, pay later services can be a great tool for people who wish to make a purchase and break up their payments into smaller, more manageable amounts,” said Ziad El Baba, general manager at Credit Karma.
“However, borrowers must be cautious about how much debt they take on and make sure they're able to follow through with the terms of the arrangement,” he said.
“This is especially important since missing a payment can have a negative impact on your credit score, which can make borrowing more costly for consumers down the line."
Millions of shoppers have been offered loans from companies such as Klarna, Clearpay, and Laybuy, to provide them with an unregulated, interest-free means of borrowing money for their shopping, which has steeply risen during the coronavirus pandemic.
These include splitting payments at checkouts and paying for their goods, which in most cases are fashion items, in 30 days, interest-free.
Credit Karma’s research shows providers have acquired 1.6 million net new users in 2021 so far, bringing total number of UK active customers to 11.6 million.
By the start of October this year, Credit Karma said Brits had spent £5.79bn via BNPL.
This is despite concerns around lack of regulation, as the debt bubble is only going to increase with 31% planning to up their use of BNPL this Christmas.
Many worry consumers will be encouraged to spend beyond their means as shopping debts continue to rise across the UK.
Last week the UK government launched a consultation on BNPL services for the first time ever, in a bid to regulate the sector.
Credit Karma has said BNPL could contribute to an “opaque debt bubble,” as nearly half of customers (45%) admit to falling behind on payments.
Those falling behind are experiencing more than just debt. Nearly a third say they (31%) have seen their credit score drop as a result, while a similar number believe that they have been rejected for a mortgage or other borrowing after missing repayments.
More than half of users (52%) admit that it's easy to overspend or lose track of your budgeting when using BNPL, and four in 10 (40%) say it’s too easy to buy using the service without realising they were entering into a credit agreement.
Watch: The risks of buying now and paying later