According to this ASIC report, the buy now, pay later (BNPL) industry has been experiencing substantial growth. The number of BNPL transactions between 2015-2020 grew by 39%, with services and revenue expected to grow further in the next five years.
How does “buy now, pay later” work?
It’s a system that allows you to buy items from stores and pay the credit provider later in installments.
It’s similar to using credit cards except that there is no card involved. Credit providers do not require credit checks.
All you need to do is open an account with your provider before or during the transaction. Then wait for them to approve your purchases within a few minutes.
It looks like a simple way to buy expensive items, but it may not always be the best option for you.
That’s why you need to look at both the pros and cons of the service.
The Pros and Cons of Using Buy Now Pay Later Services
First of all, look at your circumstances if you want to take advantage of the system.
The Pros
The pros of buy now, pay later systems are what hooks and traps most people. These are:
1. Fast approval – You get your approval within a few minutes of application. Unlike most credit cards, providers do not check your credit history before approval. Providers ask for basic information, including the account from which they will deduct your payments.
2. Pay in installments – It’s easier to pay off your purchase in installments, making it easier for the pocket.
3. Automated deductions – You don’t have to line up at the bank or log into your online account to make payments. The provider automatically deducts from your transaction account you indicated when you applied.
4. No interest charges – Most providers do not charge interest for things you buy on credit. They only charge a fee if you pay late. It happens mostly when you don’t have sufficient funds in your transaction account by the due date.
The Cons
By now, you might be thinking. It’s the most convenient way to buy items – even if you are short on cash. But the convenience also presents disadvantages when you use the service irresponsibly.
1. High fees on late payments – The money you borrow may not attract interest. However, if you fail to pay on time, the provider will often charge you a high late payment fee.
The late payment fee on the buy-now-pay-later charges is sometimes lower than the credit card late payment fees. But the fee is still a considerable amount of $10 compared to the $20 or more for the credit card.
2. Due date is non-negotiable – when you purchase an item through the system, the provider decides when to auto deduct the payment from your checking account. The date is non-negotiable.
If the due date falls a few days before payday and there are insufficient funds in your account, then expect to pay a late payment fee each day of the delay.
3. It Affects how you manage your debts
No credit checks and a fast approval process may lead some people to abuse the system. You believe your credit history remains untouched, therefore buy anything and everything on credit.
4. Negatively affects your future loan applications
Because of the royal commissions in Australia, most lenders have tightened their lending requirements. Now they look into how applicants use the buy now, pay later services.
If they find anything wanting, such as delayed payments might cause them to decline your loan application. Disapproved loans for whatever reason affects your credit score.
Instead of buying items using the buy now pay later services, consider building up your financial literacy and spending smart.
Does Afterpay Help Your Finances?
We have looked at the pros and cons of after-pay services, but does it help your finances?
Does Afterpay help build your credit? – Missing payments doesn’t necessarily affect your credit score neither making timely payments increases your credit score. Afterpay services do not reportto any credit bureau. However, your repayment history reflects how best you honor your financial obligations.
Does Afterpay affect getting a loan? – Yes, it affects your chances of getting a home loan. Lenders often look at what you owe on such accounts and your repayment history during your loan application assessment.
Is buy now pay later a good or bad idea?
Buy now pay later system is a good option if you need to finance a purchase fast. However, paying in full is the best way to avoid late payment fees.
If you can’t afford an item up front, it’s wise to save money every week or month until you have enough to buy it rather than credit.
If you have a bad credit score, buy now; pay later systems will keep you racking up charges. Alternatively, work at debt consolidation or balance transfer credit, or any other debt repayment plans.
Of course, the one answer we don’t want to hear is – do we REALLY need whatever the item is or we being tempted by easy payment terms?
If your answer is yes it’s an item you’ve been planning to buy but you’re only a few dollars short – you can also consider using PressPay which provides access to a percentage of your normal paycheck ahead of time.
