Are young people headed for financial ruin?
Almost a quarter of 18 to 24 year olds use ‘buy now, pay later’ schemes once a week. But as the UK plummets into recession, their online shopping habits risk plunging them into severe debt. Closer investigates...
❛ I’M YOUNG AND LURED IN BY ‘ FREE’ CLOTHES – I’LL THINK ABOUT THE CONSEQUENCES LATER ❜
With online clothing sales booming during lockdown, more and more young people are turning to “buy now, pay later” (BNPL) options to pay. BNPL is a form of credit used by online retailers where shoppers pay back their purchases in gradual instalments – but shockingly, 60 per cent of the UK population doesn’t consider this to be “real” debt.
BNPL app Klarna is the UK market leader, with over 8 million customers. Klarna saw a surge in revenues at the start of lockdown but, worryingly, 45 per cent of young people who have used a BNPL scheme in the last year have missed at least one payment.
Finance author Alice Tapper has launched a campaign, Go Fund Yourself, and is urging for better regulation of BNPL apps.
Alice tells Closer, “BNPL services can be useful if used sensibly – for example, if you’re unsure on sizing and order more than one fit and you quickly return the spare. However, there can be serious consequences to using these schemes.
“Many BNPL products are interest-free and therefore don’t have to be regulated, which means they can promote irresponsible financial behaviour. They tempt customers to overspend by offering discounts that are only available to customers using BNPL.”
UNLIMITED SPENDING
While Klarna states that they have a rigorous verification process, they accept up to 80 per cent of applicants. And, despite the legal age for credit being set to 18, they only ask users to enter their name and date of birth as proof of identity – rather than a valid ID. Klarna says that this information is enough to allow them to carry out appropriate checks using various “authentication strategies”, but on TikTok – a video app where 69 per cent of users are 13-24 – children as young as 16 have posted videos of shopping hauls that they claim to have bought via BNPL schemes.
Alice says, “The worry is that young people may be able to sign up at the click of a button. Underage teens could fraudulently use their parents’ details, and as long as the provider can verify them, it gives children access to go on unlimited spending sprees.
“Klarna’s ‘instagrammable’ pink aesthetic is also designed to appeal to young customers – but young people have limited experience with lenders, and don’t know the impacts of being in debt or having a low credit rating.”
Klarna insist they are transparent about their services – they include information about how they are regulated, and the responsibilities they have to their customers, on their website and in their terms and conditions.
When appr approached by Closer Closer, Luke Griffiths, Klarna’s vice president, commented, “Klarna exists to give shoppers financial flexibility, convenience and control – and to do so responsibly. Most of our customers use our services safely and successfully, and we recognise our role in protecting consumers and ensuring they fully understand our products. It’s why we recently launched our KlarnaSense and Mindful Money campaigns to encourage responsible spending.
“Crucially, we know that people’s circumstances can
Buy now, pay later 'growing fast' amid debt fears
change, and have a dedicated team that supports customers who are in financial difficulty. Customers who are struggling to repay their debt should get in touch with us directly so that we can help them find a solution that suits their situation.”
But Alice fears BNPL providers do not adequately protect their customers. She says,
“It’s important consumers are told upfront about the risks of getting into debt. We urgently need tighter regulation surrounding advertising and also better protection for younger customers, particularly at checkout.”
MOUNTING BILLS
Jennifer Brookes, 22, from Birmingham, knows the risks of using BNPL schemes.
Jennifer – who has never even applied for a credit card – says that unlike traditional loan companies, Klarna was quick and accessible. Since registering in March 2019,
she’s borrowed around £3,000 to buy clothes.
Now, every pay day, she repays approximately £200 each month, to cover her bills. Jennifer is required to pay the full amount back, within 30 days of purchase. She says, “I downloaded the Klarna app in March 2019, as I was in my final year at university and there were lots of parties to celebrate finishing exams.
“Frittering away £30 here and there seemed harmless, but it quickly added up to more expensive bills, which I had to use my student loan to pay off.
“My friends were also using their student loans to pay for clothes, so it didn’t seem like a big deal, but over time the bills started mounting up.”
After leaving university, Jennifer got a job as a sales assistant to help pay off her loans – but during lockdown, she started spending again.
She says, “I’ve been shopping more to cheer myself up. Most weeks, I’ll place orders with online fashion retailers. And if an influencer advertises something they’ve bought with Klarna, I’ll most likely get it too.”
Klarna says there are numerous “friction points” when paying with them that ensures shoppers know the risks – but Jennifer disagrees.
DEBT COLLECTORS
She says, “When I use the app, it feels like I’m spending free money. But it’s pretty gutting each month when the first thing I use my paycheque for is my huge Klarna bill – usually around £200 a month, which is a lot considering I work parttime in retail.”
Online retailers can decline Klarna payments if you haven’t paid your most recent bill. Klarna say that they work with customers who are struggling to repay, and that less than 1 per cent of their entire customer base default on their payments – but that still amounts to 850,000 people not paying their bills. Jennifer explains, “A few months ago, I received a letter through the door warning me I hadn’t paid my bill.
“I worried debt collectors would arrive, so I quickly paid it off. It scared me at the time
– I want to buy a house one day and don’t want to have a bad credit score. But it was only £20 and I hadn’t been charged interest, so the shock soon wore off.”
And it hasn’t put Jennifer off. She says, “I should probably stop, but it’s just so convenient. It’s easy to get carried away.
“I do worry about how being in debt could affect my future financial options, but while I’m young, I’m more lured by the temptation of ‘free’ clothes – I’ll think about the consequences later on.”