Should you use a ‘buy now, pay later’ service?

June 1, 2021

Services such as Afterpay have given us the opportunity to purchase goods we might not ordinarily be able to buy – however, there are a few things to think about before using a ‘buy now, pay later’ (BNPL) scheme. 

If you’ve been shopping online recently, you may have noticed an option to use a BNPL service at checkout – do Afterpay or Laybuy sound familiar?

These services offer interest-free ways, without credit checks, for you to buy what you need now while paying it off over an agreed period.

Sound too good to be true? Maybe not – if used wisely.

However, it’s important to understand all the pros and cons before using a BNPL service to avoid getting caught out and trapped in debt.

How it works

To understand the dangers, we should look at how BNPL services operate.

If you select to pay with BNPL, the BNPL service will pay the retailer for the goods you have purchased on your behalf, while you repay the BNPL service back over an agreed period.

Although the BNPL service doesn’t charge interest, it does charge a percentage fee to retailers who offer the service – and from a customer perspective, late fees to people who don’t keep up with payments.

 
Stage one
You select BNPL at check out - this could be Afterpay or Laybuy etc.
Stage two
The BNPL service charges the retailer a small percentage fee for using its service
Stage three
You pay the BNPL service back over the agreed period.
Stage four
The BNPL service makes a profit on any missed or late repayments.
Previous
Next

This is important because this is where you could find yourself in trouble.

For example: if you miss your scheduled repayments with LayBuy, you receive an initial $10 late fee for each late item, and a further $10 if the repayment of each item remains unpaid each week. Laybuy can also arrange a debt collection agency to collect the amount you owe.

If you miss your repayments with Afterpay, you will receive an initial $10 late fee, and a further $7 per week if the payment remains unpaid each week after the due date.

Missing repayments can therefore leave you with the original amount to pay as well as penalty payments on top of that.

Credit checks

It’s also important to highlight that even though most of these services don’t require a credit check, nor do they affect your credit score, lenders still regard BNPL services as a line of credit because you’re borrowing money.

Lenders will take your BNPL purchases into consideration alongside your other debts, expenses, and overall risk profile when deciding if they should give you a loan or not. 

Tip – BNPL is interest free, but you’ll still owe interest on your credit card if you use it with a BNPL service – and credit card debt can be just as overwhelming when it’s spread across four fortnightly instalments.

Unless you manage your credit card well, switch your BNPL account to a debit card to keep things simple.

Should you buy now, pay later?

As with all forms of credit, it’s important to proceed with caution.

If you can pay for it at the time of purchase, pay for it.

It removes the risk of missing a payment because you forgot to schedule a payment reminder, or because of changing circumstances.

An eight-week period, the time it takes to repay, is a long time.

A lot can change within that time.

Whether that’s a sudden family death, natural disaster or car accident – why risk the stress when you can pay and get it out the way?

Avoid using BNPL services to pay for everyday needs such as groceries.

If you need credit to pay for rent and groceries because you can’t pay upfront, it is a sign you could be struggling financially and need support.  

Accessing credit to pay for everyday costs might be a quick fix that could extend your debt.

If you miss a payment and start paying late fees – your situation could worsen.

If you are in this situation, you should seek support.

If you have unmanageable debt, talk to our team about DEBTsolve or call Money Talks.

You could be able to access an essential item

There are times in our lives when we need to buy an essential item such as a washing machine or fridge, but it is not possible due to a lack of funds.

BNPL offers an interest-free way to buy your essential item, but you can incur costs if you miss a payment.

You might be eligible for one of our Good Loans instead – you can borrow up to $1,500 at no interest for an essential item, and there are no late fees or charges.

BNPL services can fuel unhealthy shopping behaviour.

If you have an existing retail addiction, it can make it all too easy to access those instant-gratification purchases and spiral into unaffordable debt.

If you’re going to use a BNPL service, make sure it’s for an essential item that you need.

BNPL services may be useful for people who follow a budget.

Add the numbers to your budget and work out how many purchases you can realistically pay off at once.

It’s important to set aside money for food, power, rent and any unexpected costs.

If you can pay for it at the time of purchase, pay for it.

It removes the risk of missing a payment because you forgot to schedule a payment reminder, or because of changing circumstances.

An eight-week period, the time it takes to repay, is a long time.

A lot can change within that time.

Whether that’s a sudden family death, natural disaster or car accident – why risk the stress when you can pay and get it out the way?

Avoid using BNPL services to pay for everyday needs such as groceries.

If you need credit to pay for rent and groceries because you can’t pay upfront, it is a sign you could be struggling financially and need support.  

Accessing credit to pay for everyday costs might be a quick fix that could extend your debt.

If you miss a payment and start paying late fees – your situation could worsen.

If you are in this situation, you should seek support.

If you have unmanageable debt, talk to our team about DEBTsolve or call Money Talks.

You could be able to access an essential item

There are times in our lives when we need to buy an essential item such as a washing machine or fridge, but it is not possible due to a lack of funds.

BNPL offers an interest-free way to buy your essential item, but you can incur costs if you miss a payment.

You might be eligible for one of our Good Loans instead – you can borrow up to $1,500 at no interest for an essential item, and there are no late fees or charges.

BNPL services can fuel unhealthy shopping behaviour.

If you have an existing retail addiction, it can make it all too easy to access those instant-gratification purchases and spiral into unaffordable debt.

If you’re going to use a BNPL service, make sure it’s for an essential item that you need.

BNPL services may be useful for people who follow a budget.

Add the numbers to your budget and work out how many purchases you can realistically pay off at once.

It’s important to set aside money for food, power, rent and any unexpected costs.

Conclusion

Deciding whether to use BNPL is a personal choice based on your financial situation and spending habits.

Make sure you use BNPL with care.

If you’re having trouble with your money and struggle when it comes to making repayments, using BNPL could put you in a worse situation.

Good Loans team

Good Loans team

Good Shepherd NZ

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