A buy-now-pay-later (BNPL) debt bubble could be building after it was revealed usage of the repayment scheme soared during Christmas.
A total of £3.3 billion was spent using BNPL schemes in November and December, data from Adobe revealed.
This represents a year-on-year jump of 12.7% and accounted for 13.5% of total online spending in the two months.
Usage of the scheme was most prevalent during Cyber Monday, where figures grew by over 17% compared to 2022, and on Boxing Day, which saw a 10% rise to £54 million.
Risk of buy-now-pay-later
BNPL has grown in popularity during the cost-of-living crisis due to its ability to break up payments for products over several months without interest being added to the original purchase price.
However, should users not make their BNPL repayments on time - shoppers are usually given an average of three months to repay - the interest rates attached can rocket to as high as 36% APR, with late fees also sometimes added in.
Dealing with BNPL late fees can be trickier than with other lenders as it can prove difficult to keep track of repayments and they may still request cash even if a product has been returned.
Liam Evans, a director at Alvarez & Marsal and a BNPL expert, believes the lack of regulation surrounding the financing should be of concern, especially as missed payments could negatively impact one’s ability to get credit in the future.
"[One risk] is the ease at which consumers - who are typically of younger generations and not as financially literate - can use the service, without needing much knowledge on the impacts of such loans regarding missed payments,” he told Proactive.
"In 2022, Klarna joined up with Deliveroo. Should the government be allowing individuals to pay for their delivery, which as nice as it is to have, could ultimately then lead them into debt, right?" the BNPL expert added.
"So you've got all these people, sort of young, finishing uni, getting in debt and have no idea that they're about to get into this horrible area. All because they had they got a 20 quid delivery pizza."
Looking forward, he believes the next quarter will be "super interesting" as this will be the time when the huge wave of Christmas BNPL loans mature.
In wider online shopping, Adobe found that UK shoppers spent a total of £24.4 billion shopping during the festive period, a year-on-year increase of 3.7%.
Although this figure outperformed Adobe’s estimates by around £300 million, the increase was below November’s inflation figure of 4.2%.
14.54pm - Updated for Evans' comments with Proactive