Buy now, pain later? The rising cost of convenience credit
Discover the growing costs of buy now pay later credit and how it’s changing shopping behaviour.
You see it online or in-store and fall instantly in lust with it. You do the mental sums quickly and remember that your cashflow won’t survive paying for it all at once. Then, like a bolt from above, a sign appears telling you that you can spread the cost over three or four “easy” payments. Boom! Before you know it, you’re onboard the ‘buy now pay later credit train’!
Buy now pay later credit has changed the way we shop. It’s made it a lot easier to buy more goods with readily available convenience credit – without any credit checks. The ease with which it can be accessed – usually just by downloading an app has driven its popularity and growth in Australia.
According to the Australian Securities & Investments Commission’s (ASIC) most recent update on the industry, the number of transactions grew by 75 per cent in the 2018-19 financial year. While this success has helped the struggling retail market in Australia, there is also a growing dark side for those who use it.
Some of the key take-outs of the report were that one in five people surveyed who use buy now pay later credit had missed a repayment in the last 12 months. Unfortunately, this appears to be a growing problem, with revenue from missed payment fees for all providers surveyed, totalling over $43 million for the 2018–19 financial year, an annual increase of 38 per cent.
While most providers don’t charge interest, if you miss a payment you’ll be charged late fees for each missed instalment. Should the automatic direct debit not make the payment due to a lack of funds or an expired credit card, you’ll also be up for other fees.
Apart from being slugged with big missed payment penalties, there were some other alarming impacts for buy now pay later shoppers.
Late or missed repayments can negatively affect your credit score, which isn’t ideal if you’re looking to borrow for a home or other large purchase that requires credit checks.
The report also suggested that this kind of unregulated, easily accessible credit was very appealing to financially vulnerable people who can least afford it.
Around 20 per cent of users said they’d missed or were late paying other bills to make their buy now pay later payments on time. These bills included:
- 44 per household bills
- 32 per cent credit card payments
- 22 per cent home mortgage payments.
Avoiding the wrath of missed payment fees comes at other personal costs. In order to make their buy now pay later payments on time 20 per cent of consumers surveyed said they had cut back on or went without essentials like meals, while 15 per cent said they had taken out an additional loan.
In the last 12 months, this problem got worse when consumers took out more buy now pay later (BNPL) credit.
- With one BNPL arrangement, 16 per cent of consumers cut back or went without essentials.
- With 2 BNPL arrangements, 20 per cent of consumers cut back or went without essentials.
- With 3 BNPL arrangements, 25 per cent of consumers cut back or went without essentials.
So what are the possible traps you need to be aware of with buy now pay later credit?
It should come as no surprise that convenience credit encourages impulse spending. Buy now pay later apps can lead to bad spending habits, including more spur-of-the-moment purchases. It challenges our usual purchase decision making process and leads to instant gratification that other forms of payment just can’t complete with. Lay-by forces us to wait for the goods, as does paying upfront if we have to save up for the full amount. This can give many shoppers a false sense of security that they can afford things they may have thought twice about before.
Without industry regulation, most providers don’t perform credit checks or have proof of income requirements. This is particularly dangerous because financially vulnerable people may access more debt than they can service. This can lead to missed payments, more fees to be paid and financial distress.
Another thing to watch is when your repayments fall due. With many providers, you don’t get to choose which day your payments come out of your account. Unless you’re careful, this could lead to bank dishonour and overdrawn account fees. It’s a good idea to read the fine print to know when payments are due, what penalties apply and other terms and conditions of the credit that may impact your financial situation. That way, you may be able to avoid the pain of buy now pay later credit.