The Financial Conduct Authority (FCA) has just announced that buy now, pay later is going to be fully regulated from July, 2026 – here is what you need to know
In recent years, a new form of ‘free’ credit has revolutionised the way we Brits shop. It’s simple, popular and you can use it to buy pretty much anything you can think of, from clothes to cars.
Buy now, pay later (BNPL) credit is available at virtually every online store you visit. Retailers love it, because it allows us all to buy more than we can afford. It also makes us more likely to commit to buy what’s in the online basket, rather than walking away if money is tight that month.
Credit firms love it as they get paid in a variety of ways for offering this type of lending on behalf of retailers. And many readers love it too, as I find out every time I write about my BNPL concerns when I criticise aspects of the industry!
But those concerns are justified. BNPL allows, or even encourages people to ‘sleepwalk’ in to debt, by making it easier to purchase things we neither want or need – and can’t afford.
It’s been used for silly, frivolous purchases like pizza. And most concerningly, some firms have been worryingly quick to lend to people massively in debt, or to pass on outstanding balances to debt collectors far too quickly.
So it’s good news that the regulator, the Financial Conduct Authority (FCA) has just announced that BNPL is going to be fully regulated from 15 July, 2026. The FCA has also announced a whole range of new rules and requirements for the industry to tackle some of these concerns. Here’s my guide to how BNPL works.
What is buy now, pay later credit?
BNPL works by giving you a short-term loan, with or without interest, so you can buy goods or services even if you can’t afford to pay the full price up front.
Retailers have been actively pushing BNPL credit and you’ll be hard pressed to find one that doesn’t offer BNPL when you shop online. There are three main types of BNPL credit.
Limited instalments
The most well-known form of BNPL deal works by letting you pay in a limited number of instalments interest-free – usually in three payments. This means you can buy things up front that you may not have the money for in full at point of purchase. However, you have committed to buy. This is unregulated at the moment.
Try before you buy
This is where you have a short period of time – usually 30 days but sometimes as low as 14 days – to ‘inspect’ goods before committing to buy them.
These deals allow you to try things on, check goods out and see if they work for you before committing to buy. However, if you don’t return the goods on time, you could find you’ve bought them. Bear in mind the 14 days just mirrors your existing online shopping rights under the Consumer Rights Act. This is unregulated at the moment.
Credit agreements
These deals are closer to the older credit deals in that you pay in instalments over a longer period and pay interest. This isn’t as high as some retailers charged in the past – it’s usually less than credit card interest – but is still higher than a standard bank loan.
How popular is buy now, pay later lending?
There are lots of different types of regulated credit agreement out there. These include:
- Personal loans
- Overdrafts
- Car finance
- Short term, high interest loans (formerly payday lending, but over longer periods of time)
- Catalogue credit
- Regulated BNPL loans
Unregulated buy now, pay later loans are referred to by the regulator as ‘Deferred Payment Credit (DPCs) – and they are massively popular.
It’s estimated that around 11 million people used BNPL credit last year alone for short term borrowing. That’s 20% of all adults (up 3% from the year before). However, 1.1 million people had over £500 outstanding on their unregulated BNPL loans. Just under 10% of people used BNPL to pay for essential goods, like food or utility bills.
What happens if you can’t pay?
While BNPL firms may not charge debt interest, many readers have reported that businesses are quick to pass on debts to debt collectors who have a whole range of penalties and pressure tactics they can apply – and they can register financial debts with credit reference agencies. Worryingly, this can happen for relatively small sums.
What do the new rules say?
According to the FCA, from next year businesses offering BNPL will have to:
- Carry out upfront checks to make sure people can repay what they borrow.
- Offer ‘fairer and faster access to refunds’
- You’ll also have the right to complain to the Financial Ombudsman like other regulated forms of credit.
At present, BNPL firms are rather vague about the checks they undertake to see if you can afford to borrow money. With most forms of lending the business will undertake a ‘soft’ or ‘hard’ credit check to see if you can afford to borrow. Soft checks don’t go on to your credit file, hard ones do.
If the lender doesn’t check your credit file, it won’t know how much you’ve borrowed – which means you might be hopelessly in debt and they won’t know. You might also have multiple BNPL loans too. At the height of the payday lending frenzy, the average number of loans per borrower was seven. So people were drowning in debt and just getting in deeper.
These new proposals will mean that stricter affordability checks will be required which should identify people who are overstretched financially and are already in debt. The FCA estimates that over the next decade, this will mean that people will be £1.8 billion better off. Assuming that they don’t borrow money elsewhere instead, that is.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist