Using Buy Now, Pay Later Schemes to Your Advantage
Good old-fashioned saving for that new must have item and layby seem to have gone out the window with the number of buy now, pay later schemes fast growing!
These can work and help you to budget well but we are often asked by clients how these effect your credit rating and if they help cash flow, keeping debt low and budgeting effectively.
What is Afterpay?
Afterpay is a line of credit, aka debt. Think of it as Layby in reverse. You can shop with Afterpay online and instore and take the items home straight away, paying for them in four instalments over an 8-week period. The system is really user-friendly, clearly outlining your payment history, sending text reminders and processing payment super efficiently. Once you’ve created an account, purchasing through Afterpay is almost automatic so you’ll never have to roll out of bed to get your credit card again.
Buy now, pay later is so lucrative because payments are interest-free, you can’t go wrong, right? Not quite. Brands are loving this scheme because people are making impulse purchases faster and more frequently than they would have without these services and now more than 7,000 retailers have caught on. Instead of saving up for that new wallet, you can now take it home straight away plus grab the matching bag and pay it off over the next two months. But what if we asked you in two months if you still wanted the wallet and bag? Chances are you’ve moved on and completely forgotten about them!
How does it make money?
Afterpay makes money in two ways.
First, retailers reportedly pay 4% of the purchase price to Afterpay, basically taking a reduced profit for your interest-free payment plan.
Secondly, Afterpay makes money from failed payments. So, if your card declines on the date of payment you have 24 hours to log onto your account and pay the amount due, otherwise, Afterpay charges a $10 late fee.
Where after pay is useful
Afterpay wouldn’t be the billion-dollar business today if it didn’t have a place in the market. Some of the main benefits to using Afterpay and others in the market which work in a similar way include:
fast, easy approval process
Setting up an Afterpay account to access a line of credit is so simple, it can quite literally be done in minutes.
Interest-free Terms.
By using Afterpay, you don’t have to pay interest on your fortnightly installments. Afterpay prides itself on being free for users, with the only costs being the price of your purchase and the $10 late fees, which pale in comparison to interest rates as high as 20% for credit.
Staggered Payment Plan
It can be hard to have the discipline to create and stick to your own payment plan, so Afterpay does it for you by splitting the total amount of your bill into four equal fortnightly installments. Say, for example, you can afford the $400 item but you are budgeting $50 a week to ‘splurge’, and rather than dip into your health savings account you decide to pay the item off over 8 weekly payments at $50 a pop – then you’re doing it right!
Can be a good alternative to a credit card
According to an Afterpay study, millennials are 37% less likely to use a credit card than older generations, because they view them as too risky and costly. The same research also found that millennials are increasingly turning to buy now, pay later products to manage their finances.
The issue
While Afterpay can be good if it’s used responsibly and you can comfortably make the repayments, something tells us most people using the service aren’t. Some of the issues associated with Afterpay and buy now pay later schemes include.
Encourages impulse spending
The biggest red cross against Afterpay is that it can encourage bad spending habits. Platforms like Afterpay are a game-changer for impulse shoppers because you can quite literally take your purchase home and it’s yours before you’ve even put a dollar towards it.
Late payment fees
Late fees are one of Afterpay’s biggest sources of revenue. If you don’t have enough money on your card to cover the automatic payment and your card declines, you have 24 hours to log into your account and pay the amount due, otherwise, Afterpay will charge you a $10 late fee. Another $7 is charged if you fail to meet the repayment within seven days from the due date. Missing all four repayments for a $300 purchase, for example, can see you charged up to $68 in late fees. Ouch.
Can affect your ability to apply for loans
Since the Royal Commission, lending requirements have tightened, with stories being told of applicants being denied for home loans because they spent too much money on UberEats or had an outstanding Afterpay balance. Even though Afterpay doesn’t require a credit check nor does it affect your credit score, lenders still regard buy now, pay later services as a line of credit because you’re borrowing money you don’t have. Lenders will take your Afterpay purchases into consideration alongside your other debts, expenses, and overall risk profile when deciding if they should give you a home loan or not.
Minimal credit checks
Most of us are pretty bad with credit. The average Australian has around $2,000 in credit card debt, according to data from the Reserve Bank. If you’re already an irresponsible spender, you could find yourself in even more trouble with buy now, pay later platforms like Afterpay as they usually don’t require a credit check.
Helpful reminders
Be aware of your financial situation and be honest with yourself about what you can and can’t afford.
The best way to keep track and create realistic spending habits is to do a budget. It is never too early or late to seek our advice from a financial planner to help put together a plan to help you make the most of your money.
Look at the refund policy. If you realise you have made an impulse purchase and bought something you don’t actually need. Have a look at the refund policy and see if you can return the item for a credit or full refund. A lot of companies offer full refunds today.
*This advice is general in nature and does not take into account your personal objectives, financial situation, or needs. You should consider whether the advice is suitable for you and your personal circumstances before deciding whether to act on it.