Buy now pay later explained

Buy Now Pay Later services like AfterPay and ZipPay are growing rapidly in Australia as many people embrace the opportunity to take home goods or pay for services, they may not immediately have the money to pay for. The number of people using these products has soared from 400,000 in 2015 to about 2 million last year, according to data from the Australian Securities and Investments Commission.

While these products may appear at first to be just another way to pay, it is important to realise they are really another form of credit – and like any other form of credit, you need to keep control of how much you borrow, or it can negatively impact your credit health.

Once the law comes into effect, if you apply for a BNPL account, you’ll be asked for information on your income and expenses; however, the details of the questions are likely to be less than you would be asked when applying for a credit card or home loan. Plus, you probably won’t be asked to provide the same amount of proof of your income and expenses, e.g. you probably won’t be asked to provide pay slips or bank statements (but that will depend on several factors, like the type/size of the BNPL account and your financial and personal situation).

The BNPL provider will also do a credit check to see what type of credit you currently have and how you have used that credit.

What is a credit check? A credit check is when a company reviews your credit report to see how you’ve managed loans and debts in the past. This helps them decide if they should approve your application. 

Despite less rigorous affordability checks, BNPL can still have a lasting impact on your credit health, and even your credit report. You need to be very careful you use the services responsibly so that you do not take on debt that you cannot repay.

BNPL products are credit products, just like any other loan, and will take regular repayments from your bank accounts or credit card. As with credit cards, you will be charged a late fee if you miss a payment and the BNPL product will start becoming more expensive to use if the repayments are not being paid on time. If you use your credit card to pay for the BNPL product, you may also incur fees and charges with your credit card provider if these transactions are not paid off quickly.

Aussies are buying into BNPL services because of their convenience instore or online, and many people like the discipline of the repayment plans offered. And with so many BNPL services now available (such as Afterpay, ZipPay, BrightePay, PayRight, Openpay & Humm) access to credit is never far away.

However, ease of access to credit can also make it more difficult to track your debts and you might find that you struggle to make other payments you need to make e.g., regular bills. Because of that it is important that you have a clear idea of the incomings and outgoings in your account and stay on top of your bills and all scheduled payments, including BNPL.

Importantly, using BNPL can affect your ability to get credit from lenders when you apply for a credit card or a loan. This is because other lenders you approach may look at your BNPL purchases when working out how much you can afford to borrow.

With that in mind, here are some tips for consumers to take control of their financial health if using BNPL:

1. Be conscious of other repayment obligations. Make sure you are not paying your BNPL repayments at the expense of other debt, such as your car loan, mortgage, or credit card.
2. Know your limits. Keep track of your BNPL usage and put a limit on it yourself. If you exceed or get close to your self-imposed limit, minimise further use until you have paid off your existing debt.
3. Consider linking your BNPL account to your debit card instead of your credit card. Using credit to pay off credit by linking to a credit card is just postponing repayments - using a debit card means you are using your own money and might be avoiding credit card interest.
4. Costs can add up. You are charged fees if you miss a payment for a BNPL product. It can add up if you are regularly late for payment.
5. Having good credit is important. Keeping your credit report healthy by paying your bills on time will make you look better to a lender the next time you need to apply for credit. It takes time to build up positive payment habits to show that you are a trustworthy borrower. The best way to build good credit health is to focus on using credit sparingly and responsibly, only applying for credit you can afford and making payments on time.
6. Make a budget and stick to it. Spending responsibly will make sure your credit is healthy even after events like COVID-19. If you are struggling, speak to your lender and ask for assistance.

The most important thing to remember, just because Buy Now Pay Later may seem like an easy way of using credit, just like other forms of credit, if not used correctly it can become a problem for your credit health.

There is a great deal of confusion among consumers in this space. The bottom line is that BNPL is credit the same as any other debt you may have – and so for consumers the same principles apply – look after your credit health by only taking on debt you can really afford.