BNPL Affordability Checks Expanding to Small Loans

FCA Proposes Stricter Regulations for Buy now, Pay Later Services

The UK’s Financial Conduct Authority (FCA) is set to introduce new regulations for Buy Now, Pay Later (BNPL) services, aiming to enhance consumer protection in the rapidly growing credit sector. The proposed changes include creditworthiness checks for BNPL loans under £50, a move designed to safeguard consumers who might otherwise be exposed to financial harm.Currently, 1.1 million individuals in the UK have outstanding debts of £500 or more, and 5.3 million owe £50 or more. The FCA’s consultation paper highlights that approximately half of all BNPL agreements involve advances below £50. By extending creditworthiness checks to these smaller loan amounts, the FCA seeks to prevent “loan stacking” – the practice of consumers taking out multiple loans from different providers without adequate oversight.

Vikki Brownridge, Chief Executive of the debt charity StepChange, emphasized the necessity of proper regulation for BNPL, noting its widespread adoption among UK adults. She stated, “BNPL can be a useful budgeting tool, but it can deepen debt problems, and it is indeed crucial struggling consumers are afforded the same level of protection as for other forms of credit.”

Under the proposed regime, BNPL lenders will be required to obtain authorization from the FCA, mirroring the requirements for traditional financial institutions like mortgage and secured loan providers. Firms will have a six-month window to apply for authorization once the new regulations come into effect on July 15, 2026.

The FCA is currently seeking feedback on these proposals, with BNPL lenders and consumer advocacy groups invited to submit their responses by September 26.

Is the expansion of affordability checks to BNPL adn small loans likely to decrease access to credit for some consumers?

The Shift in Lending Landscape: BNPL and Beyond

For years, “Buy Now, Pay Later” (BNPL) services like Klarna, Afterpay, and Affirm have largely operated with lighter affordability checks than conventional lenders. This accessibility fueled rapid growth, particularly amongst younger demographics. Tho, increasing regulatory scrutiny and rising consumer debt are driving a meaningful change: the expansion of robust affordability assessments – previously reserved for credit cards and personal loans – to encompass smaller BNPL purchases and, crucially, small loans offered by these same providers. This isn’t just about compliance; it’s about responsible lending and protecting consumers.

Why the Change? Regulatory Pressure & Consumer Protection

The catalyst for this shift is multi-faceted.

Financial Conduct Authority (FCA) Intervention: in the UK, the FCA has been particularly vocal about the risks associated with unchecked BNPL growth. New regulations, implemented in June 2024, mandate that BNPL firms must be fully authorized and adhere to affordability checks.

Increased Consumer Debt: Reports from credit bureaus show a rise in consumers holding multiple BNPL debts, sometimes leading to over-indebtedness. This trend has raised red flags for policymakers.

Fair Lending Practices: Advocacy groups are pushing for consistent lending standards across all forms of credit, arguing that BNPL shouldn’t be an exception to responsible lending principles.

Expansion of BNPL Services: As BNPL providers broaden their offerings to include larger loan amounts (moving beyond simple installment plans for purchases), the need for more thorough checks becomes paramount.

What Do Expanded Affordability Checks Look Like?

The new standard isn’t simply a credit score check. Lenders are now employing more comprehensive methods to assess a borrower’s ability to repay. These include:

Open Banking Integration: This allows BNPL providers to securely access a borrower’s bank transaction data, providing a real-time view of income, expenses, and existing debt obligations. This is arguably the biggest change.

Credit Bureau Data: While previously minimized, credit reports are now being factored into the decision-making process, providing a historical perspective on creditworthiness.

Income Verification: Some lenders are requesting proof of income, such as payslips or bank statements, particularly for larger loan amounts.

Debt-to-Income Ratio (DTI) Assessment: Calculating a borrower’s DTI helps lenders determine if they can comfortably manage additional debt.

Spending Analysis: Analyzing spending patterns can reveal potential financial vulnerabilities and inform lending decisions.

Impact on Small Loan Applications: A Deeper Dive

The expansion of affordability checks has a direct impact on accessing small loans – those typically under £500 (or equivalent in other currencies). Here’s how:

1. Longer Request Times: More thorough checks inevitably lead to longer processing times. Instant approval is becoming less common.
2. higher Rejection Rates: Applicants with limited credit history, inconsistent income, or high debt levels are more likely to be denied.
3. Lower Credit Limits: Even if approved, borrowers may receive lower credit limits than they would have previously.
4. Increased Transparency: Lenders are now required to provide clearer explanations for loan denials,helping borrowers understand why they were rejected and how to improve their financial standing.
5. Focus on Sustainable Credit: The aim is to encourage responsible borrowing and prevent consumers from accumulating unsustainable debt.

Benefits of Enhanced Affordability Checks

While some consumers may experience temporary inconvenience, the long-term benefits are considerable:

reduced Risk of Over-indebtedness: preventing borrowers from taking on debt they can’t afford protects them from financial hardship.

Improved Credit Scores: Responsible borrowing and timely repayments can definitely help borrowers build or improve their credit scores.

Greater Financial Stability: By promoting sound financial habits,these checks contribute to overall economic stability.

Level Playing Field: Bringing BNPL under the same regulatory umbrella as traditional lenders creates a more equitable lending environment.

Real-World Example: Klarna’s Shift in Policy

Klarna, a leading BNPL provider, has been at the forefront of adopting stricter affordability checks. In early 2024, they began sharing consumer data with credit reference agencies, a move previously resisted by many BNPL firms. This allows other lenders to see a borrower’s BNPL repayment history, creating a more complete picture of their creditworthiness. While initially met with some consumer concern, Klarna argues this transparency is crucial for responsible lending.

Practical tips for BNPL & Small Loan Applicants

Navigating the new lending landscape requires preparation. Here are some tips:

Check Your Credit Report: Review your credit report for errors and address any inaccuracies.

Manage Existing debt: reduce your outstanding debt as much as possible before applying for a loan.