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What is Afterpay? And what are its benefits and risks?

06 February 2024
• 5 minute read
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Believe it or not, Afterpay turns 10 years old this year. In the space of less than a decade, the popular digital payment platform has revolutionised the way younger Australians shop. So much so, in fact, that it has been cited as a cause of decreasing credit card use among millennials and Gen Z.

Although it looks set to be overtaken by Apple Pay in the near future, Afterpay remains Australia’s most used ‘buy now, pay later’ service at the time of writing. But what is Afterpay? How does it work? And what are its pros and cons? Read on to find out!

How does Afterpay work?

Afterpay is a ‘buy now, pay later’ service which you can select when purchasing a product online or in-store. Rather than paying the full amount upfront, Afterpay allows you to pay for your item in four equal, interest-free repayments.

You pay for the first instalment of 25% at the time of purchase, and the remaining three instalments are automatically deducted from your nominated debit or credit card over the following six weeks.

All of which sounds great but there are several potential downsides to be aware of before you dive straight in. With that in mind, let’s take a look at the pros and cons of Afterpay.

Benefits of using Afterpay in Australia

Interest-free repayments

Many people have times in their lives when buying something they need isn’t possible due to a lack of funds. Whereas other types of ‘urgent expense’ solutions (such as payday loans) come with the obvious downside of high interest, Afterpay offers an interest-free way to buy what you need now and pay it off over the following six weeks.

No credit rating impact (if used responsibly)

It’s one of the most common questions people have about Afterpay: will it affect my credit rating? The good news is that it won’t… as long as you use it responsibly.

Provided that you make all your repayments on time, using Afterpay won’t leave any mark on your credit history. It’s important to note, however, that their fine print states that they have the right to report any negative activity to ratings bureaus.

Some lenders, including Great Southern Bank, may ask you to provide your Afterpay commitments in a personal loan or credit card application.

Super-simple set-up

Setting up an Afterpay account is a breeze. It’s literally a case of entering your phone number, email address, payment method and address details.

Integration with online stores

Afterpay’s integration with many online stores’ shopping carts means everything is streamlined and straightforward. When you choose to pay with Afterpay at the checkout, you make the first of your four equal payments upfront, with the remaining three coming at fortnightly intervals after that. Drawbacks of using Afterpay in Australia

Late fees

If you miss your scheduled repayments, you may find yourself with late fees of up to 25% of the purchase price or $68 (whichever is lower). The fees start small ($10 for your first missed payment), but they can add up if you miss repayments over several weeks.

Using Afterpay without being sure you’re able to pay off the debt in time could lead to financial stress. Thankfully, the Afterpay app doesn’t let you make new purchases until your overdue amount is paid back, so you aren’t able to make a bad situation even worse.

No credit rating impact (if used responsibly)

We know we listed this point in the benefits section but it’s actually a drawback too. How so? Well, while consistently making credit card repayments on time can make a positive impact on your credit rating, Afterpay will never have the same effect, however responsibly you use it.

Afterpay and credit cards can be a bad mix

Connecting your Afterpay account to a credit card could lead to problems. Afterpay is interest-free, but you could end up with interest charges if you don't pay off your credit card balance on time.

If possible, ensure you choose a debit card as your preferred payment method.

Fuelling unhealthy shopping addictions

If you stick to buying things you need and only treating yourself occasionally, using Afterpay shouldn’t cause any issues. But if you’re a shopaholic, it can make instant-gratification purchases all too easy and potentially lead you down the road to unaffordable debt.

It’s essential to understand that Afterpay isn’t a free pass to live beyond your means.

Can’t choose when you pay

Unlike with credit cards or personal loans, Afterpay doesn’t allow you to choose the days your payments come out. This can be a pain, particularly if they don’t line up with when you get paid.

In a worst-case scenario, this could lead to penalty fees from both your bank and Afterpay, which would more than negate any savings you made by not paying interest.

The verdict - is Afterpay a good choice?

As with most financial products, Afterpay itself is neither good nor bad. When used responsibly, it can be a handy option for urgent or unforeseen expenses. But it’s important to understand that it can also lead to problems if used recklessly.

If you would like greater flexibility around repayments, or perhaps you’re thinking of a larger purchase, a personal loan might be a more suitable option.

Important Information

Great Southern Bank, a business name of Credit Union Australia Ltd ABN 44 087 650 959, AFSL and Australian Credit Licence Number 238317. Conditions, fees and charges apply. This is general information and does not take into account your objectives, financial situation or needs. Consider the appropriateness of the information, including the Terms and Conditions (T&Cs) booklet, before acting on it. The Financial Claims Scheme may apply to this product; refer to the T&Cs for more information.

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