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Buy now pay later: Is the party about to end early?


Buy now pay later (BNPL) services are skating on thin regulatory ice and tightening of laws could bring the party to an end.

It's easy to see why Afterpay and the BNPL movement have taken Australia by storm.

The idea that we can take immediate ownership of a new designer bag just out of our reach, fund the unexpected purchase of a new washing machine at an inconvenient time, or dine in a top restaurant is a game changer for many people.

What's not to love?

In our millions, we have embraced this easy access to credit. Except that it's not credit.

Just like credit providers, BNPL businesses let you buy something and pay for it over time, but because of a legal loophole, these companies are not technically classified as credit providers.

This regulatory loophole arises because BNPL companies do not charge interest. Sure, they charge fees but because it's not interest, BNPLs can skirt around Australia's credit laws without having to toe the line and play by the same rules as credit card companies and personal loan providers.

But for users of BNPL this feels very much like credit. We conducted research recently that found that almost half (46%) of those with BNPL accounts use this type of finance interchangeably with credit cards.

So, what's the big deal?

People get access to money easily and can buy their dress, fridge and pay their gas bill without having to go through cumbersome credit checks. Surely this makes the brains behind Afterpay an absolute genius?

For some people, it can be similar to celebrating Christmas every day, but for others it's a slippery slope of spiralling debt and depression with the next payment imminent.

Since BNPL companies can ignore the National Credit Act, they are also allowed to ignore the Act's responsible lending obligations.

Under the terms of the Act, any other bank or lender offering credit will need to conduct a credit check which means verifying the customer's income as well as their ability to repay the debt.

What this essentially means is that free money is landing in the hands of those who can least afford their new handbag, expensive meal out and electricity bill.

Our research found that more than a quarter (26%) of under 25s said they regularly make unintentional impulse purchases.

But these expensive treats are starting to leave a bad taste in the mouths of BNPL users and many are retreating.

The novelty is wearing off and the industry is headed for chaos.

There are more BNPL providers listed on the Australian Stock Exchange than anywhere else in the world and experts say the sector is facing a shake-up. They are laden with bad debts and none of them have made a profit. This ultimately comes down to their lack of responsible lending practices.

So how much BNPL is too much?

BNPL debt has a habit of creeping up on people – 4 easy repayments, on repeat, can quickly add up.

We found that almost 1 in 5 Aussies (17%) have spent significantly more than they intended using BNPL finance.

The biggest problem with BNPL is that people who can least afford the repayments are signing up in their droves due to the lack of credit checks.

For this reason, consumer body CHOICE is pushing for greater regulation to bring BNPLs in line with credit providers.

Regulation will solve part of the problem, but this could also open the flood gates to refunds for a portion of the 10 million BNPL users who have become saddled with unserviceable debt and no means to repay.

We have claimed refunds worth hundreds of thousands of dollars for those who have been credit checked, but still been given credit irresponsibly. The amount of money given by BNPLs to less creditworthy borrowers could in measure be very significant.

As we await news on regulation, using BNPL comes down to the individual to conduct their own checks and responsible spending plan. To avoid the debt trap we would urge spenders to consider 3 simple rules:

  1. Don't borrow more than you can comfortably repay
  2. Commit to paying on time
  3. If you're struggling to make payments, reduce or eliminate luxuries

Responsible lending laws are there to protect the borrower and like everything that seems too good to be true, the days of BNPL could be numbered.

Carly Woods, founder of junk insurance and irresponsible lending refund business Get My Refund, talks about why BNPL could face a major shake-up and lead to a new wave of refunds.

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.

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