British consumers are becoming more reliant on credit. Whether high cost short term (HCST) loans or credit to fuel a ‘buy now, pay later’ lifestyle, many consumers are stuck in a borrow and spend cycle. The lack of transparency in the industry means people are failing to see the consequences debt has on long-term financial health.

The lack of transparency in the industry means people are failing to see the consequences debt has on long-term financial health.

Collapsing credit

Tightening regulation on HCST cash loans and an increase in affordability claims have had a significant impact on the credit industry in recent years, and particularly among traditional payday lenders. The Financial Conduct Authority (FCA) has capped interest rates on HCST loans at 0.8% of the amount borrowed per day, following criticism of lenders charging extremely high interest rates to vulnerable customers. Such regulatory scrutiny of compliance and affordability checks in recent years has clearly impacted these lenders, who are unable to charge more than double the original loan value in fees. This has severely impacted business margins and trading performance has plummeted.

In the past year we have seen a spate of lenders collapse in the UK. This began with payday lender Wonga in August 2018, who after a review by the FCA of its debt collection practices, was found to be operating unfairly and was forced to pay £2.6 million to compensate 45,000 customers. This resulted in the company’s business model facing extreme detriment. The Money Shop and QuickQuid quickly followed suit due to unsustainable levels of complaints triggered by the changes in the regulation of loans, with many customers claiming they were not given the appropriate affordability checks and hence were sold loans they couldn’t afford.

Buy now pay later schemes don’t encourage budgeting but rather support the dangerous lifestyle of instant gratification…

Regulating credit

Certain consumer groups, politicians and other critics of payday lenders have welcomed the increasing regulatory scrutiny and demise of traditional high street lenders. They claim that HCST credit is an expensive way to borrow, especially for vulnerable customers who often struggle to pay back loans, pushing them into perpetual cycles of debt.

However, the solution is not as simple as banning HCST lending, as the market for rapid lending remains, with 4 million Britons still in need of safe, suitable and affordable loans. Further, there is now concern around how this demographic will be able to access credit, as an increasing number of regulated lenders leave the market, potentially driving the most at-risk and hard-pressed customers to unregulated loan sharks or black-market lenders.

Without compromising on fair trading and suitable loan caps, there is a fine line between ensuring customers are protected from spiralling debt without killing off regulated lenders, to be replaced by dangerous, unregulated alternatives.

But there’s a new way to borrow money taking the millennial generation by storm. ‘Buy now, pay later’ schemes…

Access to credit

But there’s a new way to borrow money taking the millennial generation by storm. ‘Buy now, pay later’ schemes like Klarna, a pay later service now offered online via several very popular retailers including ASOS, Topshop and, offers customers up to 30 days to pay for their purchase.

Such payment methods are popular with younger consumers on tighter budgets, who can order a number of items, try them on and return what they don’t wish to keep, without having to wait for returns to be credited. Klarna’s pay later scheme is dependent on a soft credit check only (which doesn’t show on your credit report), with no fees or interest rates charged.

Such a form of credit does not encourage budgeting but rather supports the lifestyle of instant gratification. Indeed, several of Klarna’s customers have admitted to increasing their online spending due to the pay later option. But Klarna is not the only bank offering ‘buy now, pay later’ plans. Barclaycard and PayPal Credit have started offering services where customers can pay for their transactions over a number of months. with a 0% payment plan. In a recent advert for PayPal Credit, the voiceover says: ‘perfect for when you need that extra bit for those, you know, essential purchases’, whilst a man buys a pair of £200 trainers.

Where do we go from here?

Are consumers tempted to spend more than they should with such easy and instant access to credit now? Is advertising prompting us to prioritise spending over saving? With a huge rise in young people on social media and a luxury lifestyle seemingly a few clicks away, the bad habits could have devastating effects for generations to come.

In the next article in this series, we take a look at some ways to overcome the increasing popularity of borrowing, buy now pay later schemes, and a lack of digestible credit information.