Experts have expressed concern that cash-strapped public sector workers are now making controversial purchases and later paying loans after being rejected by mainstream lenders.
Analysis by the University of Edinburgh found that one in ten public sector and NHS workers, who were initially turned down for a more conventional loan because they couldn’t afford to pay it back, got credit from buying now, later pay (BNPL) companies last year.
Researchers also found that the widespread use of BNPL products among public sector workers had “increased significantly” compared to other credits and loans, and that it had begun to crowd out other non-traditional lenders, such as those offering high-interest payday loans. .
Prof Tina Harrison, from the University of Edinburgh’s business school, warned that the increasing use of BNPL – which is still unregulated in the UK – increases the risk of public sector workers being left behind on their payments.
“The increase in the use of BNPL, especially among individuals with very low financial resilience, is extremely worrying,” she said. “Left unchecked, BNPL has the potential to lead to unmanageable debt very quickly.”
BNPL companies such as Klarna, Clearpay and Laybuy experienced rapid growth during the pandemic as online shopping boomed. While buyers usually don’t pay interest on their purchases, they still risk over-indebting themselves and are not entitled to forbearance or compensation if something goes wrong, as such businesses are not yet regulated in the UK.
Research released in June by Barclays Bank and the charity Stepchange found that nearly a third of BNPL borrowers said their loans had become unmanageable and pushed them into problematic debt. Shoppers using such services paid off an average of 4.8 purchases, almost double the 2.6 purchases in February.
The Edinburgh inquiry analyzed the transactions of 104,661 NHS and public sector workers who applied for a loan from non-profit lender Salad Money but were turned down because they were unable to pay the repayments.
Salad Money, which commissioned the study, provides loans only to public sector employees. Analysis of 174 million anonymized bank transactions by public sector employees found evidence that 54% had been dealing with direct debits – a key indicator of financial distress.
The head of Responsible Finance – an industry body that oversees the UK’s non-profit lenders known as community development finance institution (CDFIs) – said it was “shocking” to see the number of BNPL approvals among past loan applicants rejected. .
“How can it make sense that if a responsible lender says ‘no, this loan is not affordable’, an underregulated, well-funded tech darling can say yes?” said Theodora Hadjimichael.
The findings were released as part of a report showing that many key figures would struggle to pay an unexpected £100 bill mid-month, as the staff whose transactions were analyzed had an average of just £79 in their accounts. center.
It also found that BNPL users had more spending relative to their income, and generally higher overdrafts, while a significant minority were heavily indebted. While it said it was not possible to blame BNPL for those trends, the analysis found that its use tended to increase over time.