Buy now, pay later (BNPL) services are platforms that allow you to purchase something today that you then pay back in smaller segments. Think old-school layby meets the digital world - except you don't have to wait to pay in full to get your purchase. 

They are integrated into retail payment systems across the globe, and can typically be accessed via apps, the platform’s website or simply at retail checkout.

BNPL services were created to not only help customers on tight budgets take home something today that they then pay in the future, but also help make repaying a purchase more manageable than using a credit card. This is because BNPL providers offer a payment system of interest-free instalments, typically spread out over a number of fortnights.

What you can buy through a BNPL platform is determined by its participating retailers and can range from smaller items like clothing to big-ticket items like furniture and appliances. However, spending caps are typically in place to help reduce some risk to the customer, ranging from a few hundred dollars to tens of thousands on some BNPL platforms.

As credit cards fall out of favour due to their high interest rates and hard-to-meet eligibility criteria (particularly for millennials and Gen Z) the popularity of BNPL services have skyrocketed in recent years.

BNPL services are most commonly used for online shopping, such as purchasing clothing or electronics online, or even big-ticket purchases like plane tickets or white goods. They can be accessed via the app store or online from the provider's website. Different retailers will allow different BNPL services to be used at checkout, so it’s best to research which stores are affiliated with a BNPL service before you sign up.  

BNPL services may also appear in-store at checkout with some participating retailers, although online purchases are still the most popular place to use it. At checkout, simply look for the logo of your chosen BNPL service amongst the accepted forms of payment and speak to the store staff about making a purchase with your BNPL platform.

One of the main advantages of BNPL is that unlike traditional credit cards, it doesn't come with interest charges on your purchases. Instead, they split up your repayments into smaller segments, typically spread out in fortnightly instalments. But just because BNPL is interest-free, does not mean the service is free.

There are a range of fees that a BNPL provider may charge you, including:

1. Establishment fees. New customers may be stung with an upfront fee when you apply with your chosen BNPL service. These can generally range from $5-$90, depending on the provider, and may scale to the higher side depending on the amount of credit you access.
2. Account-keeping fees. Account-keeping fees, or monthly fees, differ for each platform, but generally range from $1-$15 each time a payment is late. Some providers may only charge a monthly account fee if your balance is still outstanding, while some may charge it on an ongoing basis. Keep an eye out for processing fees as well, with some providers charging this fee on top of your repayments.  
3. Late fees on missed payments. BNPL late payment fees differ for each platform, but generally range from $5-$15 each time a payment is late. Late payment fees are also typically capped at a set dollar figure or a percentage of the outstanding balance.
4. Other fees - The payment method you link your BNPL service to also may impact the ongoing cost. There are some other fees and charges that your bank or lender may sting you with that you should consider before signing up with a BNPL service:

   - Overdraft bank fees: If the BNPL provider tries to withdraw money from your account for your latest repayment, but you have insufficient funds, you may be charged an overdraft fee. Luckily, BNPL services should send you a reminder before your next direct debit so you can make sure you have money available.  
   - Credit card interest: While the advantage of BNPL services is that they don’t charge you interest, your credit card still can. If you select your credit card to be linked to your BNPL account and are unable to pay off your credit card balance on time, you will be charged interest on this outstanding amount.

There are a wide range of BNPL providers servicing Australian customers. From services offered by the big four banks, to big-name players like Afterpay, you may be able to find a provider that suits your financial goals and budget.

If you’ve always used a credit card and are curious as to how BNPL differs, or if you’re a young Australian tossing up between the two options, it’s important you understand the benefits and risks of both.

Benefits of BNPL over credit cards

• Interest-free option. The biggest advantage of BNPL over credit cards is that they do not charge you interest on your outstanding balances. The most significant costs you may face are late payment fees or dishonoured payment fees from your own bank. However, if you connect your credit card to your BNPL service, you may be charged interest by your provider.
• Simple application. Compared to jumping through eligibility hoops with a credit card, applying for BNPL services can be as simple as downloading the app. You will still need to meet the BNPL eligibility criteria, like being over 18, but this is generally much easier than with a credit card. 
• No credit check.Unlike credit cards, applying for a BNPL service may not require a credit check at the moment. However, things are expected to change in the near future. By the end of the year, credit checks are expected to become standard procedure for all BNPL applications. The inclusion of the BNPL industry under the National Consumer Credit Protection Act will make it mandatory for BNPL service providers to conduct thorough credit checks on new borrowers, aligning with responsible lending practices.

Benefits of credit cards over BNPL

• Perks and rewards. If you’re looking for perks, like flight upgrades, hotel stays and rental car insurance, these are reserved to credit card reward programs. If earning rewards on your spending is important to you, then BNPL services may not suit your financial goals.
• Variety of choice. Credit cards simply offer a greater variety of choice in the type of products on the market for a range of different customers. For example, if you’re an avid traveller, there are credit cards designed to better suit you in terms of reduced overseas costs and complimentary insurance.
• Build credit history. If you are paying your credit card in full each statement period, this may help to build your credit history and potentially boost your credit score. Plus, you’ll never pay interest charges – just like with BNPL services.

Just as with any financial product, BNPL can still impact your credit score if you’re not careful. It is like a form of credit, even if it does not charge interest like a credit card. 

The National Consumer Credit Protection Act will be amended in the near future to include BNPL companies as credit providers. As a result, all BNPL providers would need to perform a credit check when you apply. A hard credit enquiry will always show on your credit history and, if you were rejected by the BNPL provider, this rejection may be reflected too.

Next, if you continue to miss your repayments, the provider has the right to report this to a credit reporting bureau. Late payments or defaults reported against you may significantly impact your credit score and your ability to access other credit products in the future.

Further, if you link your credit card to your BNPL service and are unable to pay your card balance in full each statement period, your credit card provider may also report you to the credit reporting bureau.

It’s important to note that one of the biggest draws of BNPL providers is that many do not perform a credit check when you apply. This makes BNPL a viable option to access “credit” for purchases for many Australians with bad credit, or even young Aussies with no credit history who cannot gain credit card approval. However, this is going to change and all BNPL services will soon be required to conduct credit checks on prospective customers, and comply with responsible lending obligations.

It's worth noting that each time a hard credit check occurs, it leaves an enquiry on your credit report. Having several such enquiries on your file in a short span could negatively impact your credit score and your potential to access credit in the future. If you’re planning to sign up for a BNPL service, consider checking your credit score to know where you stand. Also make sure to set a budget so you can meet your repayments to avoid financial stress or adverse credit events.

There are a few steps you can follow to avoid getting into trouble with your chosen BNPL service:

1. Read all the terms and conditions and familiarise yourself with any potential fees.
2. Set strict spending limits that you can actually repay based on your income.
3. Avoid linking your BNPL service to your credit card if you don't pay your balance in full each statement period. Instead, consider linking it to your debit card/bank account.
4. Consider only using one platform and making one purchase with one repayment plan at a time.
5. Avoid impulse spending by sitting on purchases for at least 24 hours.
6. If you get into trouble, immediately reach out for help. Each platform should have a hardship policy or some form of financial support available to help you.

There is no one best BNPL provider as the services each offers vary and may suit a range of financial needs. This is why it’s crucial that you compare your options before signing on the dotted line to not only ensure you choose the best-suited BNPL service, but don’t pay too much in ongoing costs.

Here are some of the key factors of BNPL services that you may want to compare:

• Fees – As mentioned above, there are a range of fees that a BNPL provider may charge. Some of these fees may be avoidable if you never miss a payment. But if keeping costs low is important to you, other fees like account-keeping fees may be avoiding altogether by opting for a provider that does not charge them.
• Credit limits – Like a credit card, each BNPL service will have a set credit limit available for customers. Think carefully on the credit limit you can afford when comparing your options. For example, if you’re only looking to make small purchases online, such as clothing, then choosing a provider that caters to big-ticket purchases with higher credit limits may not suit you, and vice versa.