Paul's Insights: Buy now pay later brings new money traps
The meteoric rise of the buy now pay later industry is influencing our spending habits – and leaving younger Australians with a fresh source of debt.
Buy now pay later options are provided by the likes of Afterpay, zipPay, Certegy Ezi-Pay, and a growing range of others. The idea is that consumers can make purchases on the spot – and take the goods with them, paying the items off usually over four equal installments. No interest is charged but late payment fees can apply.
Over two million Australians use buy now pay later, up from 400,000 just two years ago. At the same time, more retailers are taking up this option. The number of retailers offering ZipPay has increased 50-fold. Afterpay has seen 45-fold growth in two years.
On the face of it, buy now pay later can be very convenient. But a survey by the Australian Securities and Investments Commission (ASIC) has highlighted potential traps. It’s a payment method that’s especially popular with younger Australians. Six out of ten buy now pay later users are aged under 34 , and more than half admit these arrangements allow them to buy more expensive items than they would otherwise and spend more than they normally would.
Already, Australians owe $900 million in outstanding buy now pay later balances, and it’s landing some shoppers in financial hot water. One in six users have either overdrawn their account, run late with other bills or been forced to borrow money to keep up with buy now pay later repayments.
These arrangements are not covered by the responsible lending laws that apply to, say, credit cards and personal loans. So the providers aren’t obliged to check upfront whether consumers can handle the repayments. That means it’s left to individual shoppers to work out if buy now pay later is a good choice for them.
This makes it important to follow a few simple steps to take advantage of the convenience of buy now pay later, and still keep your money under control. The golden rule is to think about whether you can really afford the purchase, and how you’ll handle the repayments especially if they fall due at the same time as other bills or debt repayments.
Aim to link your buy now pay later account to your debit card rather than a credit card. At that least that way you won’t end up paying high card interest. Ideally, have just one outstanding buy now pay later debt at any point in time, and get in touch with the provider early if it looks like you could struggle to make the repayments.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
Buy now pay later is a payment option that allows consumers to make purchases immediately and pay for them over time, typically in four equal installments. Companies like Afterpay and zipPay offer these services without charging interest, though late payment fees may apply.
Buy now pay later is especially popular with younger Australians because it allows them to purchase more expensive items than they might otherwise afford and spend more than they normally would. Six out of ten users are under the age of 34.
The potential financial risks include accumulating debt, overdrawing accounts, missing other bill payments, and needing to borrow money to keep up with buy now pay later repayments. These services are not covered by responsible lending laws, so consumers must ensure they can manage the repayments.
Over two million Australians are currently using buy now pay later services, a significant increase from 400,000 users just two years ago.
To use buy now pay later responsibly, ensure you can afford the purchase and manage the repayments. Link your account to a debit card instead of a credit card to avoid high interest charges, and try to maintain only one outstanding buy now pay later debt at a time.
No, buy now pay later services are not covered by the responsible lending laws that apply to credit cards and personal loans. This means providers are not required to check if consumers can handle the repayments.
If you anticipate difficulty in making buy now pay later repayments, contact the provider early to discuss your options. This proactive approach can help you manage your financial obligations more effectively.
The availability of buy now pay later options has significantly increased for retailers. For example, the number of retailers offering ZipPay has grown 50-fold, and Afterpay has seen a 45-fold increase in the past two years.
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