What is Buy Now PayLater and Who are the Main Players?
Buy Now PayLater BNPL (also known as Point of Sale Loans) allow consumers to spread the cost of purchases over a longer period rather than paying immediately in full. In most cases, the terms are interest-free, provided the repayments are made on time. BNPL firms make their money through late fees and charging retailers a percentage of each transaction.
The BNPL market has exploded in popularity, as we spend more time shopping online. BNPL is dominated by firms such as Klarna, Afterpay, Clearpay, Sezzle & Zip. Shoppers buying fashion, electronics, sporting, and household goods are encouraged to buy with a range of slick and easy options to spread the costs in just a few clicks.
It's no surprise that BNPL is popular among the tech-savvy younger generations. A 2021 Finder survey in Australia found 26% of Generation Z have used BNPL in the past year. If your spending is out of control, I recommend reading my post on the 5 Money Habits to adopt now.
Risks of Buy Now PayLater
It's important you understand the risks before using Buy Now PayLater.
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Late Fees- If you are unable to settle your account on time and in accordance with the repayment schedule you will be liable for expensive late fees. With some BNPL providers, these can be as much as 25% of the original purchase price of the item. In addition, the missed payment will also leave a dent in your credit score and report. In many countries, the default stays on your report for up to 5 years.
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It's easy to fall into a Debt Trap- there are still minimal pre-approval credit checks performed to verify your income. So it can be easy to accumulate multiple BNPL debts that you may not be able to afford. When you take out a BNPL loan, this is not reported on your Credit Report. Given how they are marketed, consumers with a poor credit history are increasingly turning to BNPL as they do not qualify for Credit elsewhere.
Does it impact my Credit Score?
The initial loan entry is not reported on your credit file and does not impact your credit score. However, this is not the case in Australia, where BNPL usage is now being monitored by the main Credit Agencies.
What does impact your Credit Score are missed payments, regardless of where you live.
Thinking of Applying for a Home Mortgage?
If you regularly use BNPL and are thinking of applying for a Mortgage in the future be careful. Previously, Banks have only been able to see your BNPL usage by looking at your late payment history on your credit report.
In Australia, Banks are now aware of the risks BNPL has become. They now review your bank statements to verify your income and assess your ability to repay the loan. As part of these checks, they look at your transactions for "excessive or irresponsible" spending habits. If they see that you have been a regular user of BNPL in the past 6 months, watch out! They may assess you as being a higher credit risk than someone who has not and offer you a higher interest rate or may even decline your application.
It is only a matter of time before regulators in other countries require banks to perform the same checks.
Benefits of Buy Now PayLater
The main benefit of BNPL is that it allows you to manage your cash flow by making smaller payments over time. As the terms are generally interest-free, it can be cheaper than spending it on your credit card.
Should I use Buy Now PayLater?
I would only recommend using BNPL if you already have the cash savings to pay for the item beforehand.
Retailers know BNPL encourages you to buy things you might not otherwise buy. Don't be tempted to buy something, just because Afterpay or Klarna make it easy.
If you found this post useful and would like more help getting your finances in shape, I'd like to help.
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Warm Regards
Paul Allen
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