Getting a buy now, pay later (BNPL) account, such as Afterpay, may seem like a no-brainer. After all, why wait until you have the cash to buy what you need (or want) when you can purchase it now and pay it back over weeks or months interest-free?
BNPL might be even more appealing right now as COVID-19 continues to impact our finances and budgets. But, before you jump on the BNPL bandwagon or continue using an existing buy now, pay later account, here are some things to think about.
Aussies riding the BNPL wave
According to recent research by money-saving comparison site Mozo, 42 per cent of Australians now have a buy now, pay later account – up 12 per cent from 2020 – with the average amount owing being $698 across all age groups.
Of those with a BNPL account, 33 per cent said BNPL is their go-to way to pay.
Some of the most common buy now, pay later purchases are big-ticket items, such as appliances, beds, and other household goods. This is followed by luxury items, including designer clothes, jewellery, pet accessories, and car accessories.
More surprisingly is that 28 per cent of BNPL spending in Australia is now on groceries, food and drink, everyday clothing and other essential items.
BNPL companies in Australia
Afterpay, Zip and Humm are the three biggest and well-known BNPL companies in Australia right now, but there are a wide range out there, including:
- CommBank BNPL
- Pay it Later
- Paypal Pay in 4
- Plan it (American Express)
The big BNPL appeal
There’s no denying the appeal of buy now, pay later. One of the biggest advantages is that, unlike credit cards, you’re not charged interest. In addition, there are usually only minimal or no other annual fees attached.
Buy now pay later accounts also make those big upcoming purchases possible. By giving you the ability to break up the cost, they can help you stick to your monthly budget and stay on track with your other commitments.
Another benefit is that most buy now, pay later companies typically ask you to make repayments on a fortnightly basis. This can fit perfectly into your wages cycle, allowing you to repay when the money comes in.
Pitfalls and how to avoid them
Alongside the pros, buy now, pay later services, like any finance service, also have some cons. So, if you’re already someone who doesn’t manage your money well or is struggling to make ends meet, it pays to be cautious.
The biggest problem is that while BNPL allows you to make purchases, it doesn’t necessarily follow that you will be able to make your repayments. And, if you don’t pay on time, late fees will be added to the amount owing.
In fact, according to earlier Mozo research, 69 per cent of Aussies say they are financially stressed by their buy now, pay later payment schedule.
To avoid the pitfalls of BNPL and take advantage of the benefits, it’s important to understand how to use it correctly. Here are our top tips:
Buy now pay later dos:
Find the BNPL service for you
While there is a whole list of BNPL companies to choose from in Australia, it’s important that you pick the right one for you. This means comparing all the providers out there and paying attention to the fine print.
Think about how often you plan to use the account, what you’re going to use it for, and how you want to spread payments. Then find a provider that fits your needs.
Stick to one account only
Tempted to take advantage of multiple buy now, pay later services? We don’t recommend it. Just as multiple credit cards and other loan accounts can be difficult to manage, multiple BNPL repayment schedules can also be a nightmare.
Plus, you could end up overcommitting yourself. It’s amazing how many small payments spread across accounts can add up.
Create a budget
The first step to successfully managing your personal finances is to make sure you’ve created a monthly budget.
This means looking at your incomings (wages, government payments) and outgoings (bills, mortgage or rent, groceries) and making the figures work. Make sure you’re not overspending each month, and you have enough to cover your BNPL and any other repayments.
Our handy budgeting calculator can help.
Set payment reminders
To avoid those buy now, pay later late fees, which can range from $5-$20, ensure you have your repayment dates firmly jotted down.
Most buy now, pay later companies will send you reminders by email or text, but it’s also worth adding them to your phone or laptop calendar just in case.
While these small fees may not seem like they will break the bank, they can have a domino effect, making it harder to pay other debts.
Buy now, pay later don’ts:
Miss your repayments
If you have a buy now, pay later account, one of the worst things you can do is default on your repayments.
Not only will you be faced with late fees, but some buy now, pay later services may also report this type of negative account activity to a credit rating agency, reducing your credit history score. If you continue to default, they can even call in third-party debt collectors.
One big problem with BNPL accounts is that they can encourage you to overspend. According to research by Choice, more than half of buy now, pay later users are spending more than they would without the services.
This is because BNPL makes impulsive purchases easy. Unfortunately, the ‘pay later’ part can also lead you to ‘worry later’ because you’ve over-committed yourself. Because of this, try to stick to just one to two purchases per month.
Don’t link it to a credit card
One of the main reasons you may have or are considering a BNPL account over a credit card account is because they are interest-free.
To ensure it remains the case, don’t make the mistake of linking your buy now, pay later account to your credit card account. Instead, link it to a debit card. This way, you won’t be at risk of paying interest on your BNPL spending.
If you are struggling to make your BNPL repayments, due to unforeseen circumstances, such as losing your job or lockdown, don’t just carry the burden.
Instead, get in touch with your BNPL provider and explain your situation. Many companies, including Afterpay, offer flexible payment arrangements to make your repayments more manageable until you get back control.
Buy now, pay later can be a great financial solution for some people, allowing you to buy things you need when you need them. But, if you’re already struggling financially, it pays to use them with some caution.