Dangers of using buy now, pay later schemes

Australians are flocking to buy now, pay later schemes but what are the dangers?

BUY now, pay later schemes are dominating the retail space as shoppers sign up in droves and worry about coughing up for their purchases afterwards.

Millions of shoppers have flocked to well-known schemes, including Afterpay and Zippay, so they can fulfil their instant gratification needs.

Afterpay has amassed more than 2.7 million customers in Australia and New Zealand in just four years, while Zippay has 1.3 million users. Other popular schemes include Openpay, Alipay and Splitit.

For older generations who may not know what these schemes are, in simple terms they work like a lay-by but in reverse. You get the items – including clothing, whitegoods and appliances – and pay them off in instalments later.

So here’s everything you need to know about BNPL schemes to ensure they don’t leave you worse off.

HOW THEY WORK

The schemes make their cash by hitting customers with a mix of charges, including accountkeeping fees or late fees, depending on which scheme you use.

They also charge retailers a percentage for every sale they make where a customer uses BNPL.

Purchases can be made either in store or online and, unlike credit cards, users are not hit with interest charges if they fail to pay off the items in full each month.

Afterpay requires customers to pay for their purchase over four instalments, due every fortnight. If the payment isn’t met a $10 late fee will apply. A further $7 will be charged if the payment remains unpaid seven days after the due date.

For each order of $40 or more, late fees are capped at 25 per cent of the original order or $68, whichever is less.

Rival Zippay charges a $6 monthly administration fee if your item isn’t paid off in full at the end of the month.

It charges a late fee of $5 if the minimum repayment of $40 is overdue for more than 21 days.

Should the account remain overdue, Zippay follows up with the customer but no further late fees are charged.

Zippay says its customers can only link payments to a debit card, not a credit card.

WHO IS USING THEM?

In short, Millennials. Data from financial research firm DBM Consultants’ Consumer Atlas, a survey of more than 60,000 Australians, found one in three 18 to 29 year olds with credit cards is frequently using buy now, pay later schemes.

People in this age group who have products at multiple banks are three times more likely to

use BNPL services.

The schemes have resonated with the younger generations, who are slowly turning away from using credit cards.

SHOULD YOU SAVE FIRST?

It’s easy to put items on the never-never these days.

Zippay co-founder Peter Gray said credit had been around for a long time and this was just another avenue to be able to pay for goods.

“People like these, unlike credit cards, because they are not revolving high balances,” he said.

“This is almost like a budgeting tool or smoothing of expenses because the repayments are in months, not years.”

However, Financial Counselling Australia’s chief executive officer, Fiona Guthrie, said she was seeing a growing number of Australians seeking help from financial counsellors after running into trouble using these schemes.

CONCERNS

There’s no denying Australians are addicted to credit. Reserve Bank of Australia figures show we owed $50.1 billion on plastic in June and more than $31 billion was accruing interest. Now, many are turning to BNPL options, which don’t charge interest and have already attracted more than $1 billion of outstanding debt. A recent report by the Australian Securities and Investments Commission found 86 per cent of consumers who used BNPL within the past 12 months planned to do so again. The Consumer Action Law Centre’s chief executive officer, Gerard Brody, said one of the biggest issues with these schemes was they were not regulated the same way as other credit providers.

“It means they don’t have to get a licence and comply with responsible lending obligations, which means they are not really checking whether you can afford to make repayments,” he said.

“They don’t have to offer you assistance if you get into difficulty with repayments as well and they don’t have to be members of the ombudsman scheme.”

But Afterpay’s head of operations for Australia and New Zealand, Melissa Bull, said “around 95 per cent of Afterpay payments never incur a late fee”.

“If you’re late on a payment we suspend your account and you cannot continue to purchase until you’re up to date,” she said.

Zippay’s Peter Gray said only one in 100 Zip customers was late paying.

“We’re proud of those results,” he said.

“Credit card usage is down so they (users) see this as a digital solution that is here to stay.”

CREDIT RATING

Mr Brody said customers should be warned that using BNPL could affect their credit rating. “We live in a credit society, unfortunately,” he said. “People who do save up before making expenditure are likely to have less financial stress. “It’s debt overhanging us that causes that stress in our lives and it can be emotionally tough, particularly when you are being contacted by debt collectors. “It’s a big problem that more and more Australians are relying on debt just to get by.” Afterpay does not conduct credit checks on customers before letting them through the front gates, while Zippay does.