The problems with buy now, pay later

Buy now, pay later (BNPL) is everywhere! You can purchase almost anything using one of the numerous BNPL service providers… from clothing to car parts, holidays to home entertainment products… you can even pay for a trip to the dentist this way.

If you shop online, you’ve probably seen the options when you get to the checkout of retailers such as Target, JB HiFi or Kmart, or maybe you’ve noticed that it’s available in-store at David Jones or Myer. Their popularity has exploded in recent years, especially during the lockdown days of the pandemic when many stores had to shut their doors and hope for customers to shop online instead.

While they can be helpful if you need to purchase an item urgently and don’t have all the cash in the bank, it can be a dangerous habit to develop as your debt can spiral quickly if you aren’t paying close attention.

Today, we take a look at some of the problems with buy now, pay later.

The buy now, pay later option allows you to make a purchase and pay for it over a series of interest-free instalments. Here in Australia, there are an increasing number of BNPL providers… including companies such as Afterpay, ZipMoney, Klarna and bundll. Even PayPal offers this option now, where you pay off your purchase in four equal repayments.

Every provider has different credit limits… some go as high as $30,000. But you need to understand, even though you have interest free payment terms, it is still a line of credit that can cost you a lot if you miss a payment. In November 2020, ASIC released a report that highlighted:

“In the 2018–19 financial year, missed payment fee revenue for all buy now pay later providers in the review totalled over $43 million, a growth of 38% compared to the previous financial year.”

One of the most common problems with BNPL purchases is that it’s hard to track your spending. Repayments can accumulate quickly if you aren’t keeping an eye on your shopping habits.

For example, if you buy a new suitcase for $120, that becomes a $30 repayment every fortnight for eight weeks.

That alone might seem easy to manage… but what if over the following weeks you also spend $200 on a new winter coat, $150 on a watch to give your brother for his birthday and $100 on a printer for your home office?

Very quickly your $30 fortnightly instalment is over $140 and could become more difficult to budget.

Another pitfall of the BNPL option is that it makes it easier to spend more money than you can really afford. Because the total of the purchase is split up across fortnightly instalments, it can make you feel that it is within your financial means… but you can get into trouble if you lose track of when a repayment is due – or how much it is.

This is especially true if you’ve made multiple purchases across a number of days or even use more than one BNPL account.

It’s important to know that applying for a BNPL service can impact your credit rating. Some BNPL lenders perform a credit check when you first apply for an account and also when you make a purchase using your credit account.

Each of these checks is recorded on your credit report as a new line of credit request or an enquiry. The more lines noted against your report, the more it can affect the outcome of future applications for larger sums of credit such as a personal loan or even a home loan.

Rather than utilising the BNPL services, why not set up a save now, buy later fund? Creating an automated deposit into a separate account is practically the same as a regular repayment being deducted. If you deposit $50 each fortnight, in eight weeks you will have $200 ready and waiting to spend. Of course, at the end of every eight week cycle you can assess whether you really want to spend the $200 or continue saving for a larger purchase!

In addition to your savings, try a new habit of sleeping on it before you make a purchase. Every time you are considering buying something via BNPL, think about whether you really need the item. Sometimes BNPL purchases are impulse buys, so giving yourself 24 hours to contemplate the cost can help. If you decide you definitely still want the item, then you can dip into your save now, buy later fund rather than spending money you don’t really have.

If you are facing financial hardship or on a low income and need to purchase an essential item such as a fridge or a computer, then you could also consider a no interest loan. You can find out more information about the No Interest Loans Scheme (NILS) on the Victorian Government website.

If you’d like to discuss your personal financial situation with a professional financial adviser then please contact our friendly team today. Read more Financial Industry articles.