The online retail market is flooded with businesses offering Afterpay, Zip Pay and other Buy Now, Pay Later offers to their customers. At first glance this seems like a great incentive – businesses can increase sales and consumers get flexible payment options.
However, there are financial implications that individuals need to be aware of. One of the first questions I had when I started hearing about these payment options was “how do they make any money?” Well in their latest report Afterpay raked in 24% of their profits from late fees (a massive $28.4 million in the 2017/18 financial year) and the remaining 75.6% from merchant fees. It’s not seeming like such a sweet deal now is it.
In a recent article from ABC News it was highlighted that the Australian Securities and Investment Commission has done its first review into the buy now pay later sector. ASIC found that unlike banks these companies are not required to lend responsibly or perform any credit checks under the National Credit Act.
However ASIC consider these arrangements as credit facilities and that means they can act if one of these companies engages in misleading or unconscionable conduct.
But isn’t it just the modern version of layby you may ask. Well in a way yes but the intrinsic difference is that consumers take their purchase home prior to full payment. Given that as a country, Australians owe $903 million in buy now, pay later debt we are obviously taking full advantage of this.
But these providers are offering interest free so it can seem like a great idea to go with this alternative. After all, the less interest, you’re paying on your credit card and the more money you have in your savings, the better for you. Right?
Well, there’s a few issues with this payment model:
- Having the option to pay smaller amounts over time can make it more attractive to consumers to buy. Meaning we end up purchasing more and usually more of the stuff we don’t need.
- Not only are we spending more of our hard-earned money on impulse purchasing but we are also filling our homes and lives with more and more clutter. We are talking emotional implications here as well as financial.
- We are spending more but we are also spending money we don’t have. With buy now, pay later we are making a future commitment for money we have probably yet to earn.
- A lot of the time we are also given the option to put the repayments onto our credit card which means that we are potentially still paying interest on the repayments.
So, what should you do if you are considering purchasing from a buy now pay later business:
- As with all purchases consider if this is something you really need or is it just a want? I think one of the best things to do is to step away from it for a few days. This can be hard to do if they’re having a big sale but it can be certainly a worthwhile thing to do if possible. Many times I have done this and I’ve come back four or five days later, realising that I actually don’t even need this item or I have something already that would do the same thing.
- Don’t buy into the hype. I have noticed especially during the Black Friday sales that many businesses pushed the buy now, pay now option but also didn’t publicise a date for the end of their sale which meant many consumer felt pressured to buy quickly so they didn’t miss out. Honestly there is always another sale and there are very few items you need to buy right this second. I encourage you to really consider whether it is your need or the hype that is driving your purchase.
- Look at the total costs and ensure they do fit into your budget. A $1000 purchase looks way more doable in $50 chunks but at the end of the day it’s still $1000 no matter how you pay it. Consider your purchase based on the total cost not the repayments.
In conclusion, I’m not a big fan of Buy Now, Pay Later. I think wherever possible, you should try and purchase things by paying for them upfront after weighing up the pros and cons. If that’s not possible, then I think the next best option is waiting and saving up the money. There are instances where this may be a good option for example if your fridge has just broken down and you can’t afford to outlay for a new one. If it’s a choice between putting it on your credit card and paying interest, not having a fridge at all or using buy now pay later then I think this is probably one of the instances where this might be a good choice.
However, if you are in this kind of financial position I would suggest looking at starting an emergency fund, even if you just put away $10 per week, it’s very empowering to have a nest egg for emergencies.
Like all purchases the most important thing is to consider your financial situation as well as whether this is a purchase that will benefit you both financially and emotionally.