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How buy now pay later can have an effective interest rate of up to 276%

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New research from Curtin University has found that late fees and account fees can make buy now pay later more expensive than a credit card.

Commissioned by Financial Counselling Australia, the research considered the cost of buy now pay later (BNPL) fees for purchases between $40 and $2,000.

It focused on 5 popular BNPL brands – Afterpay, CommBank StepPay, humm, LatitudePay and Zip Pay – and used the potential cost of fees to work out an effective "quasi-interest rate".

When compared to a credit card with an effective annual interest rate of 22%, the report found that the cost of BNPL fees can be the same or more, particularly for small purchases.

"It's evident from our research that BNPL is not a free or low-cost option compared to credit cards," Dr Lien Duong, the report author and senior lecturer at Curtin University's school of accounting, economics and finance said in a media statement.

In the report's most extreme example, the fees for missing BNPL payments would equate to a 276.12% effective interest rate.

This is based on a $30 purchase and the maximum potential fees, so it is a worst-case scenario. Other examples in the report have effective interest rates that start from 2.02% when missed payment and account fees apply.

Interest-free, with fees

While BNPL is designed to be interest-free, the Australian Securities and Investment Commission (ASIC) has previously found that 1 in 5 people miss payments. And that leads to late fees.

"The actual cost [of BNPL] will depend on how many times someone is charged fees," Financial Counselling Australia CEO Fiona Guthrie said in an interview with Finder.

The key finding of the report is that buy now pay later can be really expensive, particularly for small amounts – and most people appear to be using it for small amounts.”

Fiona Guthrie, Financial Counselling Australia CEO

Data from the Australian Finance Industry Association (AFIA) shows the average BNPL purchase is $151. This is similar to credit cards. Finder analysis shows that the average card purchase is $110.

But Guthrie said that even though "they are being used in a similar way", people think about BNPL and credit cards differently.

"A lot of people we see [at Financial Counselling Australia] don't think of buy now pay later as debt because there is no interest charge," she said.

"But they don't factor in the fact that you might pay late fees and an account-keeping fee."

To put this in perspective, the Curtin University research showed that someone who incurred late fees or account-keeping fees for an average BNPL purchase would face "an effective interest rate of 28.25% for Afterpay and 49% for humm-Little Things (sic) – significantly higher than the annual effective interest rate of 22%, on average, for a typical credit card."

Risks and regulation

At the moment, BNPL is self-regulated and exempt from the credit laws that apply to credit cards.

"Buy now pay later is genuinely not visible in the credit reporting system. And that's why people end up with multiple accounts," Guthrie said.

"And because people don't think about them as credit, it's really easy for people to get in over their heads."

Financial counsellors are seeing increasing numbers of clients using BNPL for small amounts and then paying fees for multiple transactions. In one case, Guthrie said they heard from someone "who was late on an $8 repayment getting lumped with a $10 fee".

However, the risks and costs could change in the future as the federal government has announced its intention to regulate BNPL.

"It's very welcomed that the government is going to consult about appropriate regulation for buy now pay later," Guthrie told Finder. For now, she said it's important that people "understand that it's a credit product and you need to weigh up the cost".

"If you can't make a payment as planned and it is going to be for a small amount, it will be more expensive than a credit card."

She also noted that not everyone will end up paying late fees.

"There are lots of people that can use it [BNPL]," she said. "The same way as credit cards – they work for a lot of people."

"It's just that you've got to have guardrails around it. All we want to do is make the product safer."

Want to pay off debt? Check out Finder's guide to debt consolidation. Or, call the National Debt Helpline on 1800 007 007 for free support.

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