I feel the need to stand up for a financial product that has been unfairly portrayed. This has left me feeling frustrated and annoyed that only half the facts have been shared.
I have been chewing Tom’s ear off about this for the last few months, so instead of complaining and getting frustrated, I thought I should do something about it and share the full perspective, so people can make their own informed decisions.
What I’m referring to, is ‘buy now pay later’ services. These services enable you to purchase a product upfront and pay the product off over a structured, short-term 8-week payment plan.
Now, I’m not endorsing or slamming this type of payment plan. I simply want to dismantle some common myths and put this service into context, by comparing it with other credit products that you may already be using.
1) It affects your credit score
While banks consider your ‘buy now pay later’ expenses, to determine your serviceability – your credit score will only be negatively impacted if you default on your payments. But the same logic applies to any form of credit, such as your energy bills, credit cards, student loans, home loans etc. In fact, think of it this way: the bank will assess all forms of discretionary spending to determine your eligibility to borrow, regardless of whether it is on ‘buy now, pay later’, credit card or even cash.
2) There are too many fees
There are no application fees, annual fees or interest rates and there is a tight cap on the late fees charged. This means you are not going to accrue an endless increase in late fees. ‘Buy now pay later’ providers earn most of their revenue though charging retailers a merchant fee. Yes, some users may default, but according to The Financial Review, 95% of ‘buy now pay later’ clients have not missed a payment! Most credit cards come with a litany of fees – from annual fees, to late fees and interest on unpaid amounts. Credit card companies also charge a percentage of the outstanding amount and late fees on top of this.
3) Buy now pay later puts you into credit card debt
These providers are not affiliated with any credit card companies, but whether you get into credit card debt or not, is dependent on your repayment plan. If you link your debit card (which is my recommended option), money is usually automatically deducted from your bank account – so you are not incurring any further debt. By limiting payment plans to a fixed short-term period, these services enforce discipline and prevent an ongoing state of debt. If you link your repayments to a credit card and don’t pay the credit card, then yes, it will accrue more debt.
4) You don’t have the same level of protection
In Australia, there is an industry code of practice that, ‘buy now pay later’ services must abide by. This consumer protection code contains clauses to ensure that if a customer gets into financial difficulty, the provider will offer hardship assistance. This federally mandated code also enforces upfront assessments – so these credit providers now conduct background checks to determine a user’s repayment capacity.
Additionally, the schemes must comply with the Payment Card Industry Data Security Standard to ensure that your details are safe and secure.
5) Encouraging too much borrowing
Most of these service providers will reduce your purchasing power or completely freeze your account, only if you default on payments. There is often an algorithm that looks at your overall history of repayments to determine if you can proceed with further orders. There is a strict limit on how much you can borrow – with most services capping this at about $2000.
Credit cards on the other hand, allow you to continuously borrow funds until you reach the limit, even after you have defaulted on payments. According to a study conducted by Canstar in 2018, the average credit card limit was $9100…so capping the limit at say $2,000 through buy now pay later services will prevent debt from spiraling out of control.
6) People need to “stand on their own two feet”
Whilst I do agree that people should live within their means and use their own money to pay for goods and services – there are unexpected circumstances. A girl I know spent thousands of dollars on university textbooks, yet after a few months, the textbooks never arrived. The bookstore said a refund was only possible, after the textbooks were located and returned. The girl panicked, as the books weren’t available at the library and her assessments all required a significant amount of readings. As a full-time student, living out of home, and juggling part time work, she had limited funds; so she decided to re-purchase the books through another retailer, using a ‘buy now pay later’ service. When the books from the previous retailer finally arrived, she promptly returned them and used the money to pay off the remainder of her ‘buy now pay later’ balance.
7) Some people use it as a budgeting tool
Some people use these services as a budgeting tool. The structured payment plan enables you to know exactly how much money will be deducted from your account, per installment. Because you will know some of your expenses ahead of time, you can factor that into how much you should spend and save. For instance, if you budget $200 per month for clothes and a dress you want is $350, you can use ‘buy now pay later’ services to purchase the dress but remain within your budget.
Some people also use these providers to maximise the savings in their account, therefore allowing higher interest to build up. Now obviously interest rates are low now, but in the future this will change.
Using credit can help add efficiency and ease to our lives, but like any other financial tools, it is essential we understand how the product works, so we can use it to our advantage. Financial tools will always come with pros and cons, but instead of blaming the product or service, sometimes users need to increase their knowledge and find savvy ways to align the tools with their financial strategies and goals.