BUDGET BUSTER
THE REALITY OF BUY-NOW-PAY-LATER
At first, I was in denial. No way these ‘‘buy now, pay later’’ schemes would last, I thought. Just a passing fad. Then I was angry.
The nauseating promotions rolled out by the likes of Afterpay reinforced every tired stereotype of dumb millennials:
‘‘Indulge now’’ they implored us. ‘‘I have enough clothes and shoes, I don’t need to go shopping – said no woman ever,’’ joked another. My forehead vein pulsed alarmingly.
Next came depression. People signed up in droves. Hundreds of thousands of them. Half a dozen companies entered the market, and Afterpay’s valuation soared past $7 billion.
These are the end times, I thought. Just what we need: yet another way to buy more stuff with money we don’t have.
Now I’ve reached the point of acceptance.
‘‘Buy now pay later’’ is hugely popular. Some of you have told me how much you love it. So I’ll swallow my bile, and put forward the best case for using these schemes.
THE BEST-CASE SCENARIO
The great thing about Afterpay and friends is that they’re free, so long as you make the scheduled payments on time. That means you’re enjoying the use of your money for longer. It might even be better than using a credit card that you pay off in full each month, since most cards have an annual fee.
The retailers are the ones who are paying the price, with a commission of something like 3-5 per cent on each sale. It probably still works out in their favour, because the option to pay later incentivises shoppers to spend more.
So, if you use the scheme to manage your cashflow, and never pay late fees, and don’t shop more than you otherwise would, great! You’re winning. I can get on board with this.
THE REALITY
Unfortunately, this isn’t always the case. Afterpay makes about 19 per cent of its revenue from late fees and penalties.
All the companies charge fees: they vary, but it’s usually $10 for a missed payment, then another $7-$10 for each week that you’re late. The penalties max out at either a fixed dollar cap, or 25 per cent of the purchase price.
This means you have to know something about yourself. Are you good with money? Do you have a history of always making payments on time?
If not, be honest. Perhaps you should consider alternative forms of credit.
PAY LATER VS CREDIT CARDS
The pay-later schemes are nowhere near as expensive as loan sharks and pay-day lenders, although that’s setting the bar low.
The real question is whether they’re an improvement on credit cards. After all, a credit card can already give you up to 55 interest-free days to make repayments, and sometimes longer.
And even if you are charged interest, it’s almost certainly cheaper than racking up penalties for missed payments.
Let’s say you buy a $100 pair of shoes, miss one of the instalments, and have to pay a couple weeks’ late fees. With a 25 per cent cap, you end up paying a total of $125.
If you put the same shoes on a credit card with an 18 per cent interest rate, and dragged out the payments over a full six months, you’d still only end up paying $4 – and that’s ignoring interest-free days, and the availability of low-rate cards.
It seems like a lot of young people have an aversion to taking on debt. This is the right instinct, but let’s not pretend that ’buy now, pay later’ is any better.
A part-payment plan only escapes being classified as a lending product – and having to abide by the relevant consumer protection laws – on a technicality.
For all intents and purposes, it’s debt. And not necessarily the best form of debt, either. So: handle it with great care, and be honest with yourself about whether it’s right for you.