What is Beforepay and what are the risks?

Beforepay is an app that allows you to borrow money using their Pay On Demand service, and repay it over your next four pay cycles, effectively giving you access to the wages you’ve earned but not yet received. The amount of money you could borrow or ‘cash out’ on the platform is calculated according to the salary you earn and the repayments are aligned to your pay cycles. 

Unlike other buy now pay later services such as Afterpay and ZipPay that allow you to pay off purchases in instalments, Beforepay credits money directly to your account so you can use it for any purpose. In fact, Beforepay’s Pay On Demand service is quite close to payday loans in Australia that are often criticised for leading borrowers into a debt trap. 

Beforepay says on its website that it “aims to provide an ethical and affordable payday loan alternative, disrupting high fee structures with a quick and simple service built around you and your finances.” ​​In essence, Beforepay provides an alternative to payday loans. Payday loans typically let you borrow up to $2,000 dollars that you may need to repay within a few weeks or months. 

That being said, while these types of loans could provide you quick access to money to cover immediate expenses or shortfalls, they tend to have costly fees attached to them. You may find yourself repaying a lot more than you borrowed with a payday loan. 

Beforepay gives you access to instant funds by allowing  you to receive your pay early before every pay cycle. While it doesn’t charge you any interest or ongoing fee for accessing your salary early, you do pay a 5% transaction fee on any amount you cash out on the platform, be it $100 or $1000.

As a new customer on BeforePay, the cash out limit typically allowed to you is between $50 and $1000. However, a good repayment history on the platform can make you eligible to borrow a higher amount over time, up to a maximum of $2000. 

But with the upcoming government regulations, which consider BNPL services as credit products, the automatic increase of credit limits may no longer be possible. The recognition of BNPL companies as credit providers will lead to stricter regulation in the industry, including requirements like obtaining a credit license, offering financial hardship assistance, and adhering to responsible lending obligations to ensure greater consumer protection.

Some of the potential risks or pitfalls of a Beforepay loan include:

The cost of borrowing money

Beforepay might appear to be an easy way to borrow money, but don’t forget that you’re paying $5 for every amount you borrow. While this is a cost you can bear if you rarely borrow, if you start needing Beforepay loans before every salary, then it could become a drain on your finances. You may want to review how you’re managing your money. 

The impact on your credit score

Currently, Beforepay does not run credit checks before advancing a portion of your salary. However, the recent government announcement to classify BNPL providers as credit providers will lead to more stringent regulations within the BNPL industry.

These new regulations will require BNPL providers to obtain an Australian credit license and perform credit checks on prospective customers. As a result, when you ‘cash out’ a part of your salary on Beforepay in the future, it could result in a ‘hard inquiry’ on your credit file. These hard enquiries will be visible to lenders who access your credit report when you apply for any credit product down the line. 

It's crucial to be mindful of the impact of multiple credit applications on your credit score. Several credit applications made in succession can potentially impact your credit score. Such behaviour may also raise concerns for lenders, indicating difficulty in managing finances, which may reduce your chances of being approved for future credit products.

Easy access to credit

BeforePay doesn’t run a credit check on you before advancing you a portion of the salary you’re expected to be paid by your employer. This could make the product attractive to some people who know they can’t qualify for traditional credit and are really desperate for money.

Eligibility for traditional financing 

Using a BNPL platform or a salary advance service like Beforepay could also impact your chances of getting approved for a traditional loan product, like a home loan or car loan, and hurt your credit rating indirectly.

Even if there’s no credit check presently, a lender will be able to see the repayments you make to Beforepay on your bank statements. If you take out a salary advance often, it could indicate financial trouble or poor money management. Additionally, if you owe a part of your salary to a cash advance platform, it’s unlikely you can afford another loan, at least from a lender’s perspective.

Before you get into the habit of borrowing from these types of services, you may want to look at some alternative sources of short term funds. Buy Now, Pay Later platforms, for example, may allow you to make purchases and spread out your repayments without interest charges or fees. If you receive regular Centrelink payments, you may be able to apply for an advance. You could explore some of these options before you decide to go ahead with a Beforepay loan. 

If you’re struggling to pay your bills or finding it hard to manage your living expenses between pay cycles, a salary advance may not solve the problem. Borrowing money regularly to keep up with your expenses could be a sign of financial hardship and you may want to assess your financial situation before it gets worse.

Another reason why people may sometimes consider a payday loan or a salary advance is when they know they can’t qualify for traditional finance, like personal loans. This could happen if your credit score is low, which could be the result of poor credit behaviour, such as not making your repayments on time or taking on too much debt. 

Working on improving your credit score could help you get your financial health in shape and also make you eligible for some of the best rates on personal loans and other financial products. 

If you find yourself regularly needing money between pay cycles, you’re probably living beyond your means and need to reassess your expenses. Consider drawing up a household budget to find out where your money is going and how you could cut down on expenses.

A simple way to start budgeting could be by calculating how much money you take home each month (or even a year) and once you have the money, where does it go? You could categorise your expenses into different categories, such as needs (the non-negotiable expenses like food, rent and mortgage repayments), wants (desirable but negotiable) and savings.

If you don’t have any savings, you may want to think about starting now. Savings are an important part of any healthy budget. Saving some percentage of your income each month can help you build an emergency fund that can come in handy during a period of money shortfall.

Once you’ve tracked your income and expenses – compare the two figures to check whether you spend more than you earn in a single month or even across the year? If yes, this could indicate a problem and you need to take steps to bring your finances under control.