November 5, 2019
Expert advice

When AfterPay becomes DisasterPay: The dark side of “buy now pay later” loans

AfterPay has taken the world by storm, and is popular with younger consumers who like the flexibility it offers. But many of these same consumers are vulnerable to the perils and pitfalls of “buy now pay later” schemes.

We’ve all seen the headlines. Millennials killed diamonds. Millennials killed dinner parties. Millennials killed newspapers. You get the picture.

But one thing very much alive thanks to Millennials is AfterPay, and the “buy now, pay later” credit providers that have taken the market by storm. In fact, 40.6% of these transactions are made by Millennials. You can just see the headlines now… “Millennials killed lay-by.”

But it’s not all good news, because “buy now, pay later” comes with its own perils and pitfalls. Convenience can be costly, and buyers need to beware of the traps.

Buy now, pay later. No interest - Millennial proverb

AfterPay and similar providers offer interest-free “buy now, pay later” payment plans. AfterPay allows people to purchase their items with a quarter of the cost paid upfront, with the remaining amount paid in three subsequent fortnightly payments.

These companies make part of their money from charging retailers a commission on the purchase price, which is usually around 3-4 %. Afterpay makes 80% of its revenue from retailers, with the remaining 20% coming from late fees. That’s a lot of missed payments.

Buy now, regret later: the perils and pitfalls of AfterPay

While AfterPay offers a great opportunity for buyers to manage their cash flow while making their purchases, it can also have hidden costs and unintended consequences. Here are some things you need to be aware of with this type of short term loan.

Buy now, pay later encourages impulse spending

‘I get a false sense of security that I can afford some things which I might have thought twice about in the past, because of the fact that I don’t have to pay for them immediately and have the gift of time to pay them out.’ (36–45 years, female, NSW)

(Source ASIC “Review of buy now pay later arrangements”)

Confession: I have a faux-leopard fur coat in my closet with the tags still on, an impulse buy that I have never worn - what was I thinking? We’re all vulnerable to spur-of-the-moment purchases, and AfterPay can enable our bad spending habits.

Other forms of payment force us to think twice about whether we really need to spend that money. Lay-by makes us wait for our goods, and paying upfront can make even the steeliest of intentions waver as we hand over our hard-earned cash.

Miss a payment and get slugged by late fees

AfterPay doesn’t charge interest, but if you miss or forget a payment they will charge you a $10 late fee for each missed installment, and a further $7 the week after. If an automatic debit fails due to a lack of funds or an expired credit card, you’ll also pay fees.

Most people sign up with their debit card, but if you have your credit card linked to AfterPay be aware that while their payment terms are 56 days, credit cards usually only have a 51 or 55 day interest free period - so you might get hit with interest anyway.

You might be given access to credit you can’t afford

AfterPay does not conduct credit checks and requires no proof of income before extending credit to their customers. This means that you might be taking on more debt than you can afford to service - debt that only increases with each late payment.

Easy credit can make life hard for people. Ben lived with his father and received a disability support pension. The young man had a shopping addiction and was overwhelmed with debt. On top of a $5000 credit card debt he was also able to accrue a $1500 debt with AfterPay and a $1000 debt with ZipMoney.

(Source ASIC “Review of buy now pay later arrangements”)

Your application for a home or personal loan may be denied

It’s no secret that the banks have tightened their loan criteria recently, and are scrutinising those loan applications like never before. Already we’ve heard stories of applicants being denied because they spent too much on UberEats or Netflix.

Lenders will also consider your AfterPay purchases when they are making their overall risk assessment about your ability to repay a loan. As payments are made in instalments, they may be considered as an ongoing monthly living expense.

Read the fine print to avoid buyer’s remorse

There are other things to be wary of too. You don’t get to pick the day that your payments come out, leaving you at risk of overdraft fees from your bank. Also, AfterPay has the right to sell any unpaid debt to third party collection agencies, which can mean threatening phone calls, letters and possible defaults if you fall behind in payments.

AfterPay can be an incredibly convenient way of managing your purchases for those who are responsible with their finances. The trick is to read the fine print, so you understand the terms and conditions you are signing on for. Buyer’s remorse is real!


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