Debt concerns as UK public sector workers turn to buy now, pay later

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Experts have raised concerns over cash-strapped public sector workers turning to controversial buy now, pay later loans after being turned down by mainstream lenders.

Analysis by the University of Edinburgh found that one in 10 public sector and NHS staff, who were initially rejected for a more conventional loan on the basis that they could not afford to repay it, went on to secure credit from buy now, pay later (BNPL) firms last year.

Researchers also found that the overall use of BNPL products among public sector employees had “increased significantly” relative to other credit and loans, and that it was starting to displace other non-traditional lenders such as those offering high-interest payday loans.

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Prof Tina Harrison, of the University of Edinburgh’s business school, warned that the rising use of BNPL – which is still unregulated in the UK – increased the risk of public sector workers falling 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 very quickly lead to an unmanageable debt burden.”

BNPL firms such as Klarna, Clearpay and Laybuy enjoyed rapid growth during the pandemic as online shopping boomed. While shoppers are not usually charged interest on their purchases, they are still at risk of overextending themselves with debt, and are not entitled to forbearance or compensation if things go wrong since such firms are not yet regulated in the UK.

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Research released by Barclays Bank and the debt charity Stepchange in June found that almost a third of BNPL borrowers said their loans had become unmanageable and had pushed them into problem debt. Shoppers who used such services were paying off an average of 4.8 purchases – almost double the 2.6 purchases in February.

The Edinburgh research analysed the transactions of 104,661 NHS and public sector workers who applied for a loan from the non-profit lender Salad Money, but were rejected on the basis that they were unable to afford repayments.

Salad Money, which commissioned the survey, issues loans exclusively to public sector workers. Analysis of 174m anonymised bank transactions by the public sector workers found evidence that 54% had experienced direct debits being returned – a key indicator of financial difficulties.

The head of Responsible Finance – an industry body that oversees the UK’s non-profit lenders, known as community development finance institutions (CDFIs) – said it was “shocking” to see the rate of BNPL approvals among previous rejected loan applicants.

“How can it make sense that if a responsible lender says ‘no, this loan is not affordable,’ an under-regulated, well-funded tech darling can say yes?” Theodora Hadjimichael said.

The findings were released as part of a report showing that many key workers would struggle to afford an unexpected bill of £100 in the middle of the month because the staff whose transactions were analysed had, on average, just £79 in their account by that midpoint.

It also found that BNPL users spent more relative to their incomes, and tended to have 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 its use tended to increase over time.