The concept of Buy Now, Pay Later (BNPL) is one of the hottest shopping crazes in decades. Remembering that the capability to purchase what you want without having to pay for it in full at the time of taking it with you can be fraught with hidden dangers.
Here, we explore the world of bnpl and whether it’s a financial help or a hindrance when it comes to your financial security.
What is BNPL?
As the name implies, Buy Now, Pay Later (bnpl) means you can purchase a product - especially with online shopping - and not have to pay the full amount upfront. Sometimes, you will pay the first instalment immediately, and then the rest of the cost can be split up across multiple payments over a few weeks – or longer for large purchases.
For example, if you want to purchase a coffee table for $100 but don’t have the available funds to buy it outright today, you can use a bnpl service (if the store provides the option) to get it immediately and then make payments on the purchase over the following weeks. If you use Afterpay, for example, you’ll pay four instalments of $25 every two weeks, equalling $100.
BNPL isn’t free money. You’ll need to earn the right to get bnpl credit – you can’t simply find an expensive item and use one of the services without going through the proper processes. Also, be aware, if you fail to pay on time it may affect your credit rating.
Most services are interest free. However, the catch is that if you miss any payments you’ll incur fees. These can accumulate very quickly and see you paying far more for the product than it would have cost had you bought it outright. For example, for Afterpay purchases over $40 you could end up paying 25% in late fees or up to $68 total, whichever is less.
bnpl in Australia
Much like the rapid uptake of credit cards in the 1970s and ’80s, bnpl is seeing huge interest right around the world. While Afterpay initially dominated the market, other competitors make their mark, like Zip, BrightePay, PayRight and more.
Aside from the ability to make purchases and take items home without paying full price at the counter, the main drawcard is the accessibility and the reported adoption of it by retail nationally. In a recent move, bnpl is moving into health care, and being trialed for patients at three Australian hospitals.
The uptake also reflects the growing sentiment to move away from the traditional financial sector both in the wake of the Banking Royal Commission and as millennials and Gen Z look for new ways to manage their money, such as using Neo banks.
HILDA – the Household, Income and Labour Dynamics in Australia survey from the Melbourne Institute has shown a growing decline in the use of credit cards by consumers in the age group 20 to 35 over the past 20 years.
One of bnpl's drawcards, according to some customers, is cash flow management. The items purchased are usually not expensive, making each repayment small. Spaced over time this allows people time to save and pay. However, if you miss a payment you will be charged a late fee and you can be blocked from using the service for missing payments.
In contrast, if you were to use a credit card, you would have to pay off the full amount on your credit card at the end of the month or else start accruing interest. If you haven’t saved up enough money to pay off your credit card in full, you may quickly find yourself in debt.
Like any new approach to finances, it pays to do your research into what it means for you when you're shopping. You will then be able to apply that information to your current financial situation and see whether it’s worth your while.
BNPL detractors say it preys on people with poor impulse control, and those who only have a cursory knowledge of the impact of late fees. Using it for shopping is a personal preference. If you decide to take advantage of this new payment method, be aware of the risks and if you can’t afford it – even over time - don’t purchase it.
BNPL pros and cons
Many services provide fast sign-up approval – sometimes in just minutes.
If you find what you need but don’t have the funds handy right away, BNPL gives you the time to make repayments while still getting the item immediately.
Payments are made in instalments over time, which can make paying off larger items easier on your bank balance.
Most providers don’t charge interest, only late fees.
Your credit rating may be affected if you miss repayments,
Late fees can really add up over time, meaning you may end up paying far more for a product than if you’d bought it outright.
You have no control over when your instalments are due – that’s down to the provider. So, if an unexpected bill arrives for something else, it could mean missing your repayments.
If you miss any repayments, it could negatively impact your credit rating.
The ease of approval and instant purchases can be a bad mix if you struggle with impulse control or shopping addiction.
It’s not appropriate for you if you’re already having financial difficulties as you’re more likely to be delayed with repayments.
There are dangers to using services like these for shopping, but the same is true for other credit-based payment services or even taking out a loan with a high interest rate. The bottom line is it’s an individual choice. If you find it meets your needs in the short term and you can easily pay off the instalments, then it could be ideal for managing your personal cash flow. If, instead, you’re more of an impulse buyer, it may not be the right option for you.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.