Money Bite-Size Read:
- Buy Now Pay Later (BNPL) is an increasingly available payment option.
- Under BNPL arrangements, you get the item you want instantly and pay for it later.
- We look at the news report of someone’s experience with BNPL and discuss the risks of using BNPL products.
The Money Bites Take:
It’s important to understand the risks of BNPL arrangements before using this payment option.
Have you used a buy now pay later product?
There has been a surge in the usage of these products, particularly for young people during COVID. The firms pitch you the dream because you can buy whatever you want and get it instantly. The Buy Now Pay Later (BNPL) cost is one you pay later in instalment payments. Behind the dream pitch, however, there are risks involved in using BNPL products.
The story on the Buy Now Pay Later (BNPL) cost for one consumer:
We read with interest how purchasing a $500 dress using BNPL products almost cost someone their home. This was covered in an article on the Mail Online website on 10 December 2020.
So what happened?
This news story covers a specific case study of a young person who used BNPL products to pay for a $500 dress. They liked the service, so they started using a second BNPL product.
However, when they looked for a home loan to buy a house, the mortgage broker said that using BNPL negatively affected their credit rating. The article cites this as an issue because both BNPL organisations enquired into their credit file, which was recorded as bad debt and suggested they had financial issues. So are BNPL products risky?
Here’s what you need to know about the risks of using BNPL products:
1. BNPL products are a credit card wolf wearing a sheep’s clothing
Consumer advocacy groups have called for BNPL to be regulated like other credit products after seeing the harm the services have caused consumers. Essentially BNPL offers you a line of credit by giving you a product on the promise you’ll pay for it later, but legally, they’re not a credit product.
2. BNPL products don’t always have the same regulations as credit cards
BNPL products aren’t regulated under the National Credit Code, so they don’t need to comply with credit card providers’ responsible lending rules. Instead, they self-regulate, which might explain why consumer groups want them subjected to the same laws as other credit products. If you are already paying down debt, you may want to consider if taking out an additional BNPL account is right for you.
3. You should avoid BNPL if you can’t make the repayments
BNPL products make some of their income from late fees if you can’t pay an instalment on time. More than 1 in 10 Australians used a BNPL product when they didn’t have the available cash. In 2018 Afterpay reported that it earned nearly 25% of its income from late fees, showing that not everyone can make the payments on time.
4. BNPL products might cause you to spend more money
The idea of BNPL appeals to us because we get the buzz of instant gratification. We can buy something we want without having the cash available yet. This can cause us to spend more money, with one survey suggesting that 24% of people spent more than they planned to because BNPL services were available at the checkout. However, a shop owner’s dream of getting you to spend more money might not be a dream scenario for your budget.
BNPL is just one of several available financial products on the market right now.
They are targeting young people with marketing designed to appeal to our more impulsive tendencies. Take the time to look past the marketing polish and consider if a BNPL product is right for you before you sign up to use it.