The pros and cons of using buy now pay later

Thousands of Australians are signing up for buy now, pay later (BNPL) services to purchase what they want, and pay for it later in smaller instalments.

BNPL services are especially popular with the millennials, who are gradually shunning credit cards in favour of digital services (like BNPL), offering interest-free payments to save money and avoid accumulating debt. Still, BNPL users regularly land in financial trouble, as pointed out in a recent report by Financial Counselling Australia.

It’s true that BNPL is a form of credit and using your BNPL account irresponsibly can pull you into debt. However, some BNPL providers, such as Afterpay, have in-built features to prevent users from accumulating dangerous levels of debts.

For instance, if you miss a repayment on Afterpay, you won’t be allowed to make any more purchases until you clear off your existing balance. But the problem starts when you sign up for multiple BNPL accounts, which makes it difficult to keep track of your spending.

The benefits of using a BNPL platform

When used responsibly, a buy now, pay later service could be a convenient option for managing your purchases. Here are some potential benefits of using a BNPL platform:

• Interest-free payments

Compared to credit cards, most BNPL platforms don’t charge you interest on your outstanding balances. However, they do charge you fees if your payment is late. Therefore, it’s important to use your BNPL account for products and services you can afford and ensure adequate balance in your account by the due date to avoid any dishonour fee.

• Staggered payment plans

Staggered payments make it easier to plan your purchases by paying for them in smaller and manageable instalments. However, all BNPL platforms have different spending limits and it’s worth comparing the limits on various platforms to find one that’s right for you.

For example, the maximum amount per transaction on Afterpay is typically $1,500, but there are other platforms, such as Payright, that will let you convert one large payment of up to $20,000 into smaller, interest-free instalments.

• Simple application process

Applying for a BNPL service is quite straightforward compared to the credit card application process. In most cases, you just need to download the app, but you’ll still need to meet the eligibility criteria, like being over 18 years of age and having a valid debit or credit card issued in your name to link to the service.

• An alternative to credit cards

According to a report, over a million Australians have dumped credit cards in favour of digital payment systems like BNPL platforms offering interest-free payment instalments. Greater financial responsibility and aversion to piling credit are common reasons why some people may prefer BNPL platforms than using credit cards.

For instance, if you are someone who frequently swipes your credit card to buy something you cannot afford, a BNPL platform may help you curb your spending by approving you on a transaction-to-transaction basis. However, it’s still advisable to stick to a budget to make sure you can afford to repay your BNPL purchases, or you may be hit by hefty late payment charges.

The downsides of using a BNPL platform

BNPL platforms offer several benefits if you spend responsibly but there are also downsides you need to be aware of:

• Late payment fees

Ever wondered how BNPL platforms make money if they don’t charge you any interest on your purchases? In addition to the set-up fee some platforms charge, late payment fees are perhaps the biggest revenue source for BNPL providers.

For instance, Afterpay charges you a $10 late fee. In case you fail to meet the repayment within seven days, you are charged another $7. Openpay charges you late fees if you miss a payment by more than two days. The amount charged is $9.50 per missed payment.

On the positive side, BNPL platforms like Afterpay stop you from making any further purchases as soon as you miss a repayment. But, if you use multiple BNPL services, you may find yourself trapped in a debt spiral.

• No credit checks

Many BNPL platforms approve your application without carrying out a hard credit check. This may be a plus because a hard enquiry will not show up on your credit report. However, if you are someone who finds it easy to spend money but regularly forgets to have enough money in your account for repayments, you could see your financial situation worsen with BNPL platforms that don’t require a credit check.

Some users believe that using a BNPL service will not hurt their credit rating. While this is partially true for service providers who don’t carry out a credit check for approval, if you miss a couple of repayments, your BNPL provider could report a default to a credit reporting bureau. This could impact your credit score and the ability to access other forms of credit in the future.

It’s also worth noting that you cannot use a BNPL service to build your credit history. On the other hand, paying your credit card in full each statement period can help build your credit history and potentially boost your credit score. You’ll also not pay any interest charges when you pay your credit card bills in a timely manner, just like with BNPL services.

Is it worth using a BNPL service?

The answer to that question boils down to financial discipline. Just like every other financial product, it’s important to review your financial situation and spending habits to determine whether or not BNPL is the right choice for you.

If you do decide to use a BNPL service, make sure to read all the terms and conditions to avoid any hidden fees or charges. It could also help to set strict spending limits to avoid splurging and only buy what you can afford to repay with your income.