A buy now pay later arrangement allows consumers to purchase and obtain goods and services immediately but pay for that purchase over time.
A 2018 review by ASIC into the 'buy now pay later' industry found that the number of consumers who have used products like Afterpay and ZipPay has increased five-fold from 400,000 to 2 million over the financial years 2015-2016 to 2017-2018.
The number of transactions has increased from about 50,000 during the month of April 2016 to 1.9 million in June 2018. At 30 June 2018, there was $903m in outstanding 'buy now pay later' balances.
ASIC Commissioner Danielle Press said 'Although our review found many consumers enjoy using buy now pay later arrangements and plan to continue using them, there are some potential risks for consumers in using these products.
'The typical buy now pay later consumer is young with 60% of users aged between 18 to 34 years old. We found that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.'
One in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy now pay later arrangement.
Most consumers believe that these arrangements allow them to buy more expensive items than they would otherwise and spend more than they normally would. Providers also use behavioural techniques which can influence consumers to make a purchase without careful consideration of the costs.
So before using Afterpay, ask yourself this question: What will a bank think if I’m using AfterPay to buy a $200 pair of shoes, then asking them to borrow $500,000 for a home.
Most people view products like AfterPay and ZipPay like a payment plan, almost like a modern day layby, but even better because now you can take your new shoes home and worry about paying them off later.
However, it’s not as simple as that.
Banks and lenders view these transactions like any other debt, similar to a loan repayment or credit card repayment.
And now credit files also record AfterPay and other ‘Buy now pay later’ defaults.
This means that many credit reports now contain these types of defaults.
This trend is increasing and sadly many prospective borrowers are unknowingly affecting their ability to get a home loan, investment loan, refinance or any type of credit due to misunderstanding these products.
Anyone who has ever applied for a loan of any sort, knows that your living expenses and bank statements are under review, now more than ever due to tighter lending practices, and having high volumes of ‘buy now pay later’ transactions like AfterPay and ZipPay can work against a successful application, especially if there are defaults.
Increased and highly strategic marketing, especially during the Christmas period, can be very tempting. But sometimes it just pays to wait until you can afford the purchase, or, ask yourself twice, ‘do I really need this, or will it end up unused?’
Don’t get us wrong, ‘buy now pay later’ products can be helpful, but only in small amounts and when it’s genuinely helpful or necessary.
