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Mike Laing
Published on: 9 Apr 2019

Buy now pay later services like AfterPay and Zip Pay are growing rapidly in Australia as many people embrace the opportunity to take home goods they may not immediately have the funds for.

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

It is important to consider the real impact on your long-term credit health before you use buy now pay later services and be aware that they can backfire – if not managed responsibly.

Here’s what you need to know

What is buy now pay later?

Otherwise known as BNPL, buy now pay later services are offered by retailers instore and online so that you can purchase a product or service immediately, but delay payment.

Whether you are buying fashion or furniture, you can take home the goods straight away and then pay by installments – often fortnightly – until it’s paid off.

BNPL services usually don’t charge interest to consumers, although they often charge late fees if you miss a payment. The services make a profit from the transaction fees they charge the retailers.

For example, if you buy some clothing from XYZ store for $100, the BNPL service may charge the store a 5% commission based on the value of the clothing. This means that the BNPL service will give XYZ store $95 immediately and then collect the full $100 from you over a number of payments.

Some BNPL providers aren’t bound by the same consumer protection laws as banks.

Because some BNPL services aren’t covered by the National Consumer Credit Protection Act, they don’t have to comply with the responsible lending obligations that apply to banks and other lenders.

They aren’t required to examine your income and existing debts to determine whether you’ll be able to meet your repayments on the money they are lending you.

Still, less rigorous credit checks don’t mean that BNPL can’t have a lasting impact on your credit profile. You need to be very careful you use the services responsibly so that you don’t acquire debt that you can’t repay.

Using BNPL can affect your ability to get credit from another provider.

BNPL payments are automatically deducted from your bank account or credit card, leaving a footprint on your bank statements that is visible to other lenders when you apply for a loan or credit card.

Lenders have been adopting stricter checks on customer spending before approving loans after the Banking Royal Commission urged banks to improve income and expense verification to make sure they aren’t lending people more than they can afford to pay back.

These checks can include accessing your bank statements, with your permission, when you apply for a home loan. The lender will analyse your bank data to assess your outgoings and it will be clear if you have BNPL debt that you are regularly repaying.

If the lender deems that your expenses are too high, it may decline to lend you more money, on the grounds that you may not be able to meet your repayments on the new debt.

If you overcommit, you could struggle to make your repayments on this and other debts.

Before approving your purchase, the BNPL service may take your initial instalment from your account immediately, to make sure you have money in your account. However, if you don’t make sure there is enough money in your account every time a payment is due, you could miss a payment, and also be charged late payment fees.

Using BNPL services can also have an indirect impact on your credit health if you borrow so much that you can’t afford to pay regular bills such as those from your energy or internet service provider, or repayments on other debts, such as your mortgage or credit card.

Before you sign up

If you are considering using a BNPL service, do the following before proceeding:

  • Plan ahead. BNPL is credit. Make sure you will be able to make the repayments and also meet your other obligations.
  • Check the terms and conditions. Most services charge late fees if you miss a payment, and these can add up. You may also be charged monthly account-keeping fees and payment processing fees.
  • Scrutinise the repayment schedule: Assess the frequency and size of the repayments and make sure they are suitable for you. Some BNPL providers require larger repayments that allow you to pay off your loan faster, while others allow you to make smaller repayments over a longer period.

How to pay off your debt

Stay in control and pay off your debt sooner when you use buy now pay later services by following these guidelines:

  • Set repayment reminders. Many BNPL services automatically debit your repayments from your account, so you need to make sure you have enough money coming in to cover these and still be able to pay your other debt payments and utilities. If you don’t have enough money in the account, you could get charged an overdrawn fee by the bank as well as default fees by the buy now pay later provider.
  • Link to a debit card not a credit card. Linking your BNPL purchase to a credit card can be risky because it may mean that you have to pay interest and incur increasing levels of debt on your credit card. Linking your BNPL account to a savings account can help you pay off your debt sooner while avoiding interest.
  • Be mindful of other obligations. Make sure you aren’t paying your BNPL repayments at the expense of repayments of other debts such as your car loan or leases you have taken out to buy household furniture or appliances. With BNPL repayments being automatically debited from your account, you need to make sure there is enough money left for other bills and debt repayments.
  • Make a budget and stick to it. It’s a good idea to work out how much money you need for bills, essential expenses and minimum debt repayments, and then anything that’s left over you can use for non-essential purchases or to pay off your debt faster by making extra repayments.
  • Limit your usage. Once you’ve used the service, minimise further use until you’ve paid off your existing debt. Don’t take on numerous BNPL debts at once.
  • Seek help if you need it. If you are having trouble making any of your repayments, contact your credit provider. Free financial counselling services are also available to help you get back on top of your financial situation if you are experiencing financial difficulties.

CreditSmart acknowledges 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 rules apply – look after your credit health by only taking on debt you can really afford.

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