A closer look at Buy Now Pay Later

Buy Now Pay Later (BNPL) services can help to put aspirational purchases within reach, but it’s important to be aware of the potential risks of delaying payments.  

Buy Now Pay Later (BNPL) services are becoming increasingly more popular, with over 2 million users in Australia according to the ASIC report. If you haven’t used one of these services before it essentially allows you to receive the goods or services today, and pay for it in later instalments. Here we look at how people are using this service and some key factors to be aware of to ensure it doesn’t negatively impact your financial situation.

Gone are the days of putting an item on layby and patiently waiting as you chip away at the repayments over time. Thanks to BNPL services, such as AfterPay, we no longer have to wait for the items, and even services, that we want. Offering convenience and instant gratification, BNPL services are understandably popular among Australians, with new competitors still entering the market to fulfil demand. 

In fact, according to Roy Morgan, 1.95 million Australians used a BNPL service in the year to September 2019, with people aged 25-34 being twice as likely to sign up than any other age group.  (1)

What are people buying?

Almost anything! The range of products available on BNPL is growing, from home essentials like groceries or appliances to luxuries like cosmetic dental work or a gym membership. 

While BNPL services offer many benefits, it’s important to be conscious of the impact that delaying payments could have on your finances, such as appearing on your credit report, which can impact your ability to borrow money in the future. 

1. Lack of regulation
   Anyone is able to use BNPL services, whereas credit card providers have strict regulations as to who they can issue a credit card to. Since they don’t charge interest, BNPL organisations aren’t regulated in the same way as a credit card provider. A report commissioned by ASIC discovered that only 1 in 6 BNPL providers assessed the income and debts of their customers before allowing them to use the platform. Long-term this means that due to no regulations, it is easy to wind up in great debt ultimately affecting credit rankings. (2)
2. Over-commitment 
   The lack of immediate full payment means it is easy for people to make multiple purchases without considering the overall financial impact it may have on them. One in four Australians admits to regretting a BNPL purchase or hiding it from friends or family. 
3. Fees
   When using a BNPL service, it is important to make timely repayments or risk being charged a relatively significant fee. For example, a $10 Afterpay late fee is equivalent to paying 6.67% interest on a debt of $150.
4. Changing shopping habits
   Using a BNPL service has been shown to affect how people spend. 55% of users admit to spending more than they usually would when they can use BNPL, and this is often on non-essential items. In a survey by Mozo, 60% of BNPL users say they are making luxury purchases like clothing or makeup. Overspending could affect long-term budgeting. 

1: Roy Morgan Single Source (Australia), October 2018 - September 2019, n=49,462. Base: Australians 14+

2: © Australian Securities & Investments Commission. Reproduced with permission