When it comes to making a big purchase, things used to be a little simpler. You could pay for it, or put it on credit. While we all know about the dangers of buying what you can’t afford, new services offer your the ability to spread out your payments, paying a little up front and the rest later.
Australian consumers have been very quick to adopt buy-now-pay-later (BNPL) services. In 2018 Afterpay grew 289 per cent. It’s offered by over 20,000 online retailers (you’ll find that some of these services are even available in-store too). At 30 June 2018, there was $903m in outstanding buy now pay later balances.
Make no mistake - whether you’re telling yourself that you’re just spreading out the payments, or being smart in avoiding paying the whole cost up front, you’re still borrowing.
The Sydney Morning Herald looked into the somewhat shaky thinking behind this massive and quick update of these services and discovered that:
“ASIC's recent report into the sector found one in six BNPL users delayed other bill payments or borrowed additional money as a result of using a BNPL service. Forty per cent of users earned less than $40,000 a year, which is under half the average Australian salary.”
So before you buy, there’s the boring age-old question. Can you afford it? Splitting the cost of your purchase into payments isn’t much help if you’re not going to be able to make the repayments. While you may benefit by avoiding the interest that you could accrue through using a credit card or overdraft, it’s by no means free money.
It’s this lack of interest that has allowed so many services to spring up. Because the services don’t charge interest, they aren’t governed by the National Consumer Credit Protection Act. So it's important to pay close attention to the fees you may be charged. These can include account-keeping fees, charged for the time that you’re signed up to the service, payment-processing fees, charged when you make a payment, and any late fees if you fail to make payment on time.
As well as fees charged by the service, your bank could charge you for any payments that default or overdraw your account. Unpaid payments could also affect your credit score.
So before you shop, take the time to understand the fine print. Ask yourself about what kind of spending habits you could be getting into by opting to pay after the fact. It’s a good idea to make sure that you’ve got a more complete picture of your finances and perhaps plan and save for the bigger purchases the old-fashioned way.
Before you buy, figure out what’s realistic. Moneytree will give you the complete picture of your finances.
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