What’s the deal with buy-now-pay-later?

Buy-now-pay-later services have exploded in popularity in recent years. Afterpay recently revealed that it is adding more than 15,000 customers a day and reported 6.1 million active customers globally at the end of October.
It’s easy to see the surface appeal: they make spending money extra easy, there’s (usually) no interest charged, and the product is yours immediately.
But are these services really helping the average Australian budget more effectively? Or are they simply making it easier for people to spend money they don’t have on purchases they don’t need?

Buy now pay later: A cautionary tale

When it comes to using Afterpay and the like, it can sometimes be a case of buy now and pay the consequences later.
A review by ASIC (financial services regulator) of the buy-now-pay-later sector reported one in six users “had either become overdrawn, delayed bill payments or borrowed additional money because of a buy-now-pay-later arrangement”.
The review also found most consumers believe buy-now-pay-later services allow them to buy more expensive items and spend more than they normally would.
And when it comes to marketing their services, buy-now-pay-later providers tend to use behavioural techniques that can influence people to make purchases without considering the costs.
Although it’s technically free to sign up for and use the service, users are liable to pay late fees if they don’t pay instalments on time – and that’s not the only danger.

Afterpay and your credit score

Afterpay and other buy-now-pay-later services aren’t classed as credit cards or loans, but they can still impact your credit score.
Afterpay’s terms specify that they reserve the right to conduct a credit history check. And if you fail to make a repayment, it could be reported to credit rating bureaus and lead to a drop in your credit score.
So while perfect use of Afterpay won’t negatively impact your credit score, one slip-up can lead to a black mark on your record – and that could affect your ability to borrow in the future.

Does Afterpay affect getting a home loan?

In addition to credit score considerations, the rising use of buy-now-pay-later services has made it harder for some Australians to qualify for home loans.
Many lenders are questioning whether someone who can’t afford to make an up-front purchase could afford to pay off a home loan. Likewise, lenders may doubt the savings habits and financial discipline of regular buy-now-pay-later users.
That means, hypothetically, simply using Afterpay or a comparable service – even if you pay your instalments on time – could diminish your chances of being approved for a home loan. This is especially concerning given that most buy-now-pay-later users are between 18 and 34 and in the right age bracket to start thinking about buying a first home.

Should you say bye to buy-now-pay-later services altogether?

It’s fair to say that buy-now-pay-later services like Afterpay have their place when used in moderation to make pre-planned purchases you can afford.
However, they can have serious consequences when used:

  • Regularly
  • To make purchases you can’t afford
  • To make purchases you wouldn’t have made otherwise

With that in mind, the safest approach is to treat buy-now-pay-later services as you would a line of credit: proceed with caution.