Interest-free finance, commonly referred to as "buy now pay later", has become an increasingly popular way for shoppers to pay for purchases. Platforms such as Afterpay, Zip, Openpay, Humm, Payright and Klarna allow you to spread the cost of a purchase over time without having to pay interest.
While interest-free finance isn't like a traditional loan, there are still costs involved, and it's important to understand what you're getting into before you apply. We will outline the differences between the platforms, the costs involved and how each platform works, so you can decide which one is right for you.
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.
Interest-free platforms allow you to spread the cost of purchases over time, rather than paying large amounts of money upfront for items that you want/need.
How does interest-free finance work?
Buy now pay later 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 distributing the cost over a more manageable period of time. The only difference is that you are getting finance 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 upfront.
How to use buy now pay later
- 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 Pay 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 buy now pay later 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 buy now pay later 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 be subject to pay legal fees if action is taken against you.
Compare buy now pay later providers in Australia
Watch: Afterpay vs Credit cards: Which is better?
What features are offered by buy now pay later platforms?
Each provider offers the following features with their buy now pay later 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 six months. For larger purchases, you may not have to repay your purchases in full for up to two 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.
Again, it varies depending on the provider. Line of credit products generally require monthly repayments, whereas merchant payment options are commonly paid back in four instalments.
All interest-free finance products can be applied for and approved in minutes at the point of sale or online.
The application process and loan management is done online, so you won't need to physically print or sign anything.
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.
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 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, interest might be charged 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 a credit card with a 0% p.a. introductory interest rate offer.
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