Buy Now Pay Later - Is It All That It’s Hyped Up To Be?
What is Buy Now Pay Later?
Buy Now, Pay Later (BNPL) is a relatively new credit method that allows consumers to purchase products without making the full payment all at once. Instead, the payments are spread across interest-free instalments, usually over 6 weeks. You may have heard of companies such as Afterpay or Zip, which are BNPL providers. If a late payment is made, a late fee is incurred, usually capped or associated as a total percentage of the total purchase. BNPL services are accepted for a wide range of goods and services, ranging from food to alcohol to electronics to petrol.
So that's it - they make their money just like credit card companies?
No, a super common misconception about BNPL providers is that they make the majority of their money in the form of late fees. This is not true! It's quite the opposite. Merchants (like tech stores or clothing outlets) instead pay a fee to BNPL providers to use their service. By paying a fee, merchants can sell their products or services to a wider audience who, without BNPL, would be unable to purchase their products in the first place.
It’s pretty good, then, right?
Yes, with the caveat that you are well-disciplined with your purchases, and either have money to pay off the debt or are guaranteed to be paid in the future. BNPL provides an accessible means for consumers to purchase goods now and pay for them later without extra costs.
So what's the catch?
While BNPL seems like a great purchasing method for many consumers, the use of BNPL can expose you to some significant risks, some more obvious than others.
BNPL and Credit Ratings
A super common misconception is that BNPL doesn't impact your credit rating. However, late last year, legislation was introduced to regulate BNPL, meaning it can now impact your credit rating. You can check your credit report from either Centrix, Equifax or Illion. A credit report shows information relating to lending, such as any defaults recorded against your name, how much you have borrowed, and whether you are making regular payments on time. Lenders check your credit history whenever you apply for credit (for example, mortgages, loans, car financing, etc). Thus, BNPL has the potential to negatively impact your ability to obtain many lines of credit in the future.
BNPL and Impulsive Spending
BNPL can encourage impulsive spending - spending that you have not planned for. When you distance yourself from making a purchase (such as by using BNPL), you are more likely to overspend as you don’t feel the immediate impact of that purchase. Furthermore, BNPL can also encourage spending by advertising the incremental cost of a product, making the product look more affordable than it is. In addition to this, the interface of BNPL apps encourages spending through the use of discounts, leading to unplanned or impulsive purchases. While we all love discounts, it's important to note that if it wasn’t a planned purchase, you aren't saving money… You are still spending it (sorry to break it to you!).
The Reality of BNPL for Students
BNPL definitely has its upsides - discounts, interest-free lines of credit, and can be used almost anywhere these days. It can be particularly useful to break down the cost of something that you need now, such as whiteware, a phone, or a computer. However, BNPL also provides some subtle but significant risks which can impact your financial well-being. I acknowledge that it is a luxury to simply say ‘I will just not use BNPL’, yet unfortunately, for many students across the country, this is much easier said than done. If you choose to use it, use it consciously, budget for repayments and avoid impulsive purchases. Financial skills are about making tools like BNPL work for you, not the other way around.
Opinion by Matthew Mariano