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Buy now, pay (through the nose) later?

Buy Now Pay Later (BNPL) options are at the fingertips of most Australian shoppers. These options provide the perfect instant gratification of buying something now with the “convenience” of paying it off later. But there are some serious potential pitfalls to consider.

The Australian Securities and Investments Commission (ASIC) has revealed that 20% of BNPL users go without everyday living essentials to meet repayments and another 15% have been forced to take out additional loans to make ends meet.

A staggering $9B of BNPL payments were processed in Australia during the 2019/20 financial year, with one in every five Australians regularly using these services. A growing number of merchants now offer BNPL as a payment option to increase their online and in-store transactions.

How does BNPL work?

A BNPL service lets you buy goods up to limits of around $2,000 by paying part of the purchase price at the time and the rest in instalments from a linked debit or credit card. Get what you want right now, and the merchant gets paid upfront by the BNPL provider. If you manage to pay your instalments on time, there is normally no interest or fees to worry about.

Merchants are charged a service fee for BNPL payments, and while they receive the full amount of the purchase price upfront minus the associated fee, BNPL running costs are significantly higher than other payment options such as credit cards and PayPal. Fortunately, most BNPL providers impose no surcharge rules that prevent the cost of fees being passed to you, the consumer, but there are calls to change this in the future which may increase the cost of goods to the consumer in the future.

What are the downfalls of BNPL?

Difficulty in tracking your spending

According to ASIC, more than half of BNPL users are spending more than they otherwise would, with one in six having overdrawn accounts, delayed bill payments, or borrowed money because of overcommitment through BNPL platforms.

Be careful of the effect of BNPL on your credit score and late payments!

While older Australians had largely shunned the BNPL boom, they’re now one of the growing groups of consumers. Younger people and low-income earners are very familiar with BNPL schemes, using it to shop online, buy clothing and big household items. Unfortunately, this payment option has seen a jump in the number of people struggling to pay debts – and with six out of ten BNPL users aged under 34, there is growing concern that regular late payments could affect their future credit rating and shatter their dreams of future home ownership.

BNPL schemes are unregulated

BNPL accounts might seem easy to use but people forget they’re entering into legally binding contracts that are not regulated like normal credit applications done through a financial institution such as Police Credit Union. It means people are not carefully assessed on whether they can actually afford the repayments. This can lead to financial heartbreak when something goes wrong, like losing your job, getting your hours cut or an unexpected large bill.

What you should consider with BNPL

As with any spending decision, consider whether you can afford something and really need it – as you are only delaying the need to repay a purchase. If you rely on BNPL payment options, consider the type of account access card linked to your BNPL account to avoid paying extra interest on purchases. Limit yourself to only one BNPL account to track your spending.

Could a credit card work better for you?

Although BNPL options are widely available at many merchants, they cannot be used to pay bills and daily transactions, unlike credit cards.

Here’s some of the benefits of a credit card:

  • Credit card interest free periods could be used as part of a cash-flow strategy combined with offset or redraw accounts. For example, depositing your salary in your offset or redraw accounts during interest free periods, means you do not use these funds for your daily spending. You can then benefit by having your money lowering (offsetting) the interest payable on your mortgage, until you require the funds for your credit card payment. Just remember to pay off your credit card spending once your credit card payment is due to avoid extra interest.
  • Most credit cards can be monitored with Online Banking or Banking App options with all your purchases in one area. Having different BNPL schemes makes it especially difficult to track your spending.
  • Credit cards are heavily regulated, and applications are assessed with your living expenses and affordability considered. Limits are set according to your affordability level and are helpful for budgeting but can be lowered later to reduce temptation.
  • Responsible credit card holders who consistently make repayments on time, could help to build their credit score. This could assist you in applying for more serious credit in future, such as a mortgage. No matter how responsible you are with BNPL, these schemes will not increase your credit ratings.
  • Credit Cards are accepted globally across thousands of established retailers, making them a good option once international travel becomes a possibility.

Interested in saving rather than spending? We offer safe access options to easily track both your spending and your savings with Online Banking and our Banking App.

Check out our current low rate home loan options, with options such as redraw or 100% offset accounts, along with an optional Extralite Credit Card with up to 44 days interest free.

Give us a call today to discuss your options on 1300 131 844.