Buy now pay later (BNPL)
Buy now pay later apps and services spread the cost of your purchases over multiple payments. This can make things more affordable if you are careful not to overspend.
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Buy now pay later (BNPL) has quickly become one of the most popular ways to buy goods and services. According to figures released by the RBA in October 2021, the value of BNPL transactions was the equivalent of 1.7% of Australian card purchases in the year to June 2021, with providers processing around $11.5 billion1. BNPL companies such as Afterpay, Zip, humm, Openpay and Klarna allow you to buy something right away, spread out the cost over time and not have to pay any interest.
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We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
What's the latest news on buy now pay later for July 2022?
Buy Now Pay Later debt has been flying under the radar of loan assessments for some time now, with many lenders not considering it when they assess your borrowing power. Now, APRA has told lenders that they have to factor in BNPL debt. The updated guidelines will come into place in September, but don't be surprised if you get asked about your BNPL account before then.
Previously, it was somewhat of a grey area. Because BNPL providers charge fees instead of interest, they don't fall under the National Consumer Credit Code. This is expected to change, with the new financial services minister Stephen Jones saying that he wants to start working on regulating BNPL companies.
So, if you're saving up for a home loan, your BNPL account will very likely have an impact. If you want to increase your borrowing power, you might want to pay off those BNPL debts and close your account.
What is buy now pay later?
Buy now pay later is the term used to refer to interest-free credit providers. Many people are even cutting up their credit cards in favour of this potentially more attractive shopping solution.
These interest-free platforms allow you to spread the cost of purchases over time (usually about 8 weeks), rather than paying large amounts of money upfront for items you want or need.
How does buy now pay later work?
BNPL works in much the same way as the interest-free deals major retailers have offered for years by allowing you to delay paying on your purchases and spreading the cost over a longer period of time. The only difference is that you are effectively borrowing money from a third-party provider that is available in a range of different stores, as opposed to a single retail outlet.
It works in a similar way to lay-by, but instead of securing an item for later purchase, you receive your goods right away.
How to use BNPL
- Sign up with a provider. Sign up either online or in-store. You can usually get on-the-spot approval.
- Make your purchase. Some providers only work with partnered merchants, whereas others are accepted anywhere that takes credit cards.
- Pay back what you spend. Repayments are usually made in regular instalments and are automatically deducted from your nominated card. You need to make sure that you have sufficient funds available to be able to cover the repayment.
Interest-free: What's the catch?
Most interest-free platforms, including Afterpay, charge the retailer a fee per transaction. This is how interest-free platforms make most of their money. Retailers benefit from offering options such as Afterpay and Zip because it takes away one of the biggest barriers to closing a sale – it allows shoppers to spend money they don't have.
Another way that interest-free finance platforms make their money is through fees charged for late payments. Because repayments are deducted from your nominated account or card automatically, if there are insufficient funds and you do not reschedule your repayment, you will be charged a late payment fee.
These late payment fees are usually fairly low, roughly between $2 and $12 for smaller orders. However, this can vary a lot from platform to platform and some companies may charge much higher fees. These fees can add up and send you on a debt spiral quite quickly if you're not careful.
Some BNPL providers may charge other fees, such as monthly account-keeping fees, payment processing fees or early exit penalty fees. Double-check which fees are outlined through the specific provider as charges will differ from platform to platform.
Do buy now pay later platforms conduct credit checks?
Most BNPL platforms usually perform something known as a "soft credit check". This means that they will confirm your details and check your credit records for bankruptcy or Part 9 debt agreements, but the check won't show up on your credit score (like a "hard credit check" would). If you have major defaults on your credit record, you might not be eligible.
Other interest-free platforms may not check your credit score. Therefore, it's up to you to be realistic about what you can and can't afford to pay back. While interest-free platforms don't affect your credit record when you sign up, they can report defaults to your credit reporting body, which will negatively affect your score. Depending on how many payments you miss, you may also have to pay legal fees if action is taken against you.
Compare buy now pay later providers in Australia
Afterpay vs credit cards: Which is better?
What features are offered by buy now pay later platforms?
Each provider offers the following features with its BNPL service:
- Varying loan term. Loan terms vary greatly depending on the provider and the retailer. For small-value purchases, loan terms can be as little as a few weeks to up to 6 months. For larger purchases, you may not have to repay your purchases in full for up to 2 or more years.
- Variable purchasing power. Depending on the provider, you can receive purchases prior to payment costing as little as $35 up to as much as $30,000.
- Repayment frequency. Again, it varies depending on the provider. Line of credit products generally require monthly repayments, whereas merchant payment options are commonly paid back in 4 instalments.
- Convenience. All interest-free finance products can be applied for and approved in minutes at the point of sale or online.
- Paperless. The application process and loan management is done online, so you won't need to physically print or sign anything.
- Wide acceptance. Line of credit debit cards are accepted anywhere normal credit cards are accepted. The merchant payment option is only available at partner merchants. However, there are a number of businesses offering this payment option.
- Ongoing. Unlike a loan, line of credit products do not expire once you pay off your debt. You can keep the card and use it again when required.
What to do if you can't meet a repayment
If you can't meet a repayment, it's important that you contact the BNPL provider you used as soon as possible. Most providers will allow you to defer the repayment date by a week or so without penalty. However, some providers may charge you a late fee for a missed payment.
Missing the payment without contacting your provider beforehand could see you receiving a black mark on your credit file. This could impede your chances of applying for credit in the future. Therefore, it's never a good idea to bury your head in the sand if you think you're not going to be able to meet your next payment.
How to get the most out of buy now pay later
Our 4 expert tips and tricks for getting the most out of your BNPL service are:
1. Know your rights
Your rights as a customer are likely to vary depending on which BNPL provider you are using. Therefore, it's a good idea to check the terms and conditions of your specific provider rigorously, prior to using its service. Generally, the below applies:
- Refunds. Most BNPL services provide full refunds for returns.
- Credit assessment. Many do not assess your credit, unlike credit card or personal loan companies (though some BNPL providers, particularly those with higher credit limits, may do).2
- Defaults generally not listed. If you default on a repayment, most providers will not list this on your credit record.
- Less legal protection. You have less legal protection with a BNPL contract than you would with using a credit card or a personal loan.3
- If you run into issues. BNPL schemes are not required by law to help you if you run into financial trouble or trouble with your merchant.
- Can list defaults. BNPL services can still legally list a non-payment as a default on someone's credit report, even if most choose not to.
2. Try not to spend more than you need to
It can be easy when using a BNPL scheme to end up spending more than you were planning to. Try to avoid overspending by bearing in mind that while the cost of the payments may be spread out over a longer period, it is the same amount of money.
On top of this, you run the risk of being charged late fees if at any point you don't have enough money in your account to cover an outgoing charge. Take into account weeks that you know bills or other costs will be coming out of your account and factor in the additional charge of the BNPL payments. Ensure that you will have enough money in your account for every payment date. And if it looks like it may be unlikely, remove that last impulse purchase from your cart.
3. Set up payment alerts
As mentioned earlier, missing repayments can leave a mark on your credit report.
Most BNPL providers take direct debit payments automatically. Therefore, if you forget a payment and there isn't enough money in your account, you could see your credit rating taking a dent. Avoid this by setting a reminder a few days before your repayment is due to leave your account.
This gives you time to make sure that the right amount of money is in there before the direct debit is taken. Or, if it's going to be impossible to have the cash in time, to contact the provider ahead of time to let it know. Often, providers will allow a repayment deferral of a week or more, free of charge, if they are notified in advance.
4. If you want to return an item, do so as soon as possible
To avoid paying for items you have changed your mind about, it's a good idea to make your returns as soon as possible. Ideally, you want to send or take items back before your next payment date. While most BNPL providers will refund you in full for returned purchases, it may take a few days for your refund to process. This means more time with less money in your account.
What should I consider before I apply?
While interest-free finance may be enticing and suitable in some cases, there are a number of factors to consider before using it:
- Fees. All line of credit providers charge some form of fee. Most fees are associated with cash withdrawals and missing repayments. Some charge a fee for every single transaction.
- Interest. Though most providers don't charge interest, some might charge it after an initial interest-free period. Rates can be high, in some instances up to 29% p.a.
- Minimum repayments. The minimum repayments are unlikely to repay the loan within the interest-free period. If you do not make additional repayments you will be charged interest.
- Credit record entry. Interest-free products are still a type of personal loan and can be recorded on your credit history if you don't meet your repayments. Be cautious of overusing or not repaying these products.
It's important to compare a range of interest-free offers before signing up. You can also consider an interest free credit card with a 0% p.a. introductory offer.
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