6 pros and cons of buy-now-pay-later products

Key points

• More than 5 million Australians have signed up to buy-now-pay-later (BNPL) platforms like Afterpay and Zip.¹

• The convenience, easy approval and interest free terms associated with BNPL platforms are attractive to many.

• However, one in five consumers are missing payments while many people are cutting back on essential items just to make repayments.

• If you have trouble meeting your BNPL payments, you could find your personal credit rating damaged, which can affect your ability to get a mortgage, secure a car loan, or even get a credit card in the future.

• Like any financial product, deciding whether or not to use BNPL arrangements is a personal choice based on your financial situation and spending habits.

• If you use BNPL platforms for spending you would do anyway, it can be a good way to manage your finances by spreading out the payment over a few weeks.

• But if you’re already a problem spender and have difficulty making repayments, they could make a bad situation worse.

If you’ve bought something online recently, there’s a fair chance the site you were on would have offered you the option of purchasing items via a buy-now-pay-later (BNPL) arrangement.

Most likely, Afterpay or Zip or will have been among the BNPL providers available on those sites.

Afterpay and Zip, together, now have more than 5.4 million Australian customers.² The Australian Securities and Investment Commission (ASIC) reported that the number of BNPL transactions increased from 16.8 million in the 2017/18 financial year to 32.0 million in the 2018/19 financial year, representing an increase of 90%.³

The same ASIC report also found that one in five consumers are missing payments.⁴

Worryingly, half of users aged between 18 to 29 cut back on essential items to make repayments, and more than 1.1 million transactions in 2019 incurred multiple missed payment fees. It also warned 15% of users, and half under 29, had taken out an additional loan to pay for the services.⁵

Given these findings, it’s reasonable to ask as to whether it’s a good idea to purchase items through BNPL arrangements.

What follows are some pros and cons.

Six pros of BNPL arrangements

1. It’s convenient

Buy-now-pay-later providers are fully integrated within an online store’s checkout, which makes the transaction process easy.

You just opt to pay with the named BNPL provider on the online store at the checkout, instead of your standard credit card. That’s it.

They’ll sort out the payment plan and email it to you. Once you’ve created an account, purchasing through a BNPL provider is almost automatic. There’s no need to go to your purse or wallet for your credit card to fill out the details.

You don’t have to shop exclusively online to take advantage of BNPL platforms. Providers like Afterpay, ZIp and Klarna are usually available in-store at many retailers across Australia.

2. Fast, easy set-up and approval

Setting up a BNPL account is simple, usually taking no more than a few minutes of your time.

Unlike credit card applications, BNPL providers don’t do credit checks prior to approval. Providers simply ask for some information, including the account from which they will deduct your payments.

Steps to set up an account are very much what you’d expect to find when signing up to any other website, for example:

• Create a username and password

• Provide your phone number

• Enter the verification code sent to your phone number

• Enter your name and date of birth

• Enter your bank account information 

3. Interest-free terms

Most BNPL providers don’t charge any interest on the amount you borrow – only fees for when your payment is late. This may happen if, for instance, you didn’t have enough money in your transaction account during the scheduled auto charge or by the due date.

4. Spread out payment plans

It can be difficult to create and stick to a payment plan, so BNPL providers usually do it for you by doing things like splitting the total amount of your bill into four equal fortnightly instalments, for example.

These are then automatically charged to the debit or credit card you’ve nominated when they’re due. All you need to do is make sure you’ve got enough money in your account otherwise you’ll be charged with a late fee.

5. An alternative to a credit card

A Reserve Bank of Australia report shows that a growing increasing number of Australians are giving up credit cards. In the month of May 2020 alone, Australians dumped more than 100,000 credit cards, taking the number of cards in operation back to levels not seen since 2009.⁶

Younger people, particularly, are giving up credit cards. Twenty years ago, about 60% of people between the ages of 20 and 35 owned a credit card, whereas that number now for the same age group is less than 40%.⁷

As to the reasons why younger Australians are giving up credit cards — they cite risks and costs.⁸ So, they’re turning increasingly to BNPL platforms.

If you’re someone who frequently uses a credit card to make purchases you otherwise wouldn’t be able to afford, switching to BNPL may seem a better option because you’ll avoid paying the high amounts of interest usually associated with credit cards.

To be clear, it’s still a good idea to stick to a budget and make sure you can afford to make BNPL repayments.

6. Auto charging

There’s no need to line up at the bank or log in to your online account to arrange payment. They’re automatically deducted from the transaction account you indicate during application.

Six cons of BNPL

There are advantages as well as disadvantages to most instalment plans and that’s the case with  BNPL arrangements.

Like any instalment plan, BNPL programs can be good if used responsibly and you can comfortably make repayments. However, the fact that one in five consumers are missing their BNPL payments⁹ suggests that not everything is rosy.

So here are six disadvantages of BNPL programs.

1. They may encourage impulse spending

Maybe the biggest issue with BNPL platforms is that they could be regarded as encouraging impulse spending.

With BNPL arrangements, you can literally take your purchase home and it’s yours before you’ve even put a dollar towards it. That can be tempting, but you do wonder how many people may buy things they soon realise they didn’t really want and need, and now have to pay for them.

2. Late payment fees

Late payment fees are a big source of revenue for BNPL providers.

If you don’t have enough money on your credit card to cover the automatic instalment payment and your card declines, you usually have 24 hours to log into your account and pay the amount due, otherwise you’ll be charged late fees.

Afterpay, for instance, will charge you a $10 late fee. Another $7 is charged if you fail to meet the repayment within seven days from the due date. Missing all four repayments for a $300 purchase, for example, can see you charged up to $68 in late fees.¹⁰

3. You have no choice over when payments must be made

Usually, BNPL providers doesn’t allow you to pick the day your payments come out – unlike credit card or personal loan payments.

Some people might like the fact BNPL providers create a repayment plan for you, while others may prefer to have the money deducted on a day they know they have money in their bank accounts, such as payday.

Not being able to pick when you pay leaves you at risk of racking up higher credit card debts, or your BNPL payment failing to go through and you copping the late fee/s from them until it does.

Either way, you could be opening yourself up to being hit with more fees than you need or want.

4. Can affect your ability to apply for loans

If you have trouble meeting your BNPL payments, you could find your personal credit rating damaged. This would affect your ability to get a mortgage, secure a car loan, or even get a credit card in the future.

Even though BNPL platforms usually doesn’t require a credit check nor does it affect your credit score, lenders, like banks, still regard BNPL services as a line of credit because you’re borrowing money you don’t have.

Lenders will take your BNPL purchases into consideration alongside your other debts, expenses, and overall risk profile when deciding if they should give you a home loan or other loans.

5. You’re spending money you don’t have

Previous generations of Australians would probably have thought it a little strange the idea of buying something without paying for it. Because that’s what BNPL schemes are.

Maybe it sounds a little judgemental, but it’s possible to live a fulfilling life without resorting to credit for unnecessary purchases.

It brings to mind the line about people buying things we don't need, with money we don’t have, to impress people we don’t like.

6. Minimal credit checks

Most of us are not great with credit. According to the Reserve Bank of Australia data, the average credit-card balance is about $4,000 and the average interest rate is 20% per annum, which makes for about $800 a year if you don’t pay the card off monthly.¹¹

To put that into context, that’s about half the average household electricity bill.¹²

If you’re already a person who finds it too easy to spend and not so easy to make repayments, you could find yourself in even more trouble with BNPL platforms as they usually don’t require a credit check.

It comes down to financial discipline

Like any financial product, deciding whether or not to use BNPL arrangements is a personal choice based on your financial situation and spending habits.

If you use BNPL platforms for spending you would do anyway, it can be a good way to manage your finances by spreading out the payment over a few weeks.

But if you’re already a problem spender and have difficulty making repayments, they could make a bad situation worse.

It takes just a few steps to understand your attitude to money and getting a better handle on managing your finances.

Call us on (02) 9554 3566 if you need help with your finances.

Source: MLC

1 Australians ditch credit cards as millennials turn to 'buy now, pay later' players like Afterpay, Zip. Nassim Khadem, 17 August 2020. https://www.abc.net.au/news/2020-08-17/credit-cards-ditched-millenials-buy-now-pay-later-coronavirus/12534560, accessed 8 March 2021

2 Ibid.

3 20-280MR ASIC releases latest data on buy now pay later industry. Australian Securities and Investment Commission press release 16 November 2020 https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-280mr-asic-releases-latest-data-on-buy-now-pay-later-industry/ accessed 8 March 2021.

4 & 5 Ibid.

6 Australians ditch credit cards as millennials turn to 'buy now, pay later' players like Afterpay, Zip. Nassim Khadem, 17 August 2020. https://www.abc.net.au/news/2020-08-17/credit-cards-ditched-millenials-buy-now-pay-later-coronavirus/12534560, accessed 8 March 2021.

7 & 8 Ibid.

9 20-280MR ASIC releases latest data on buy now pay later industry. Australian Securities and Investment Commission press release 16 November 2020 https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-280mr-asic-releases-latest-data-on-buy-now-pay-later-industry/ accessed 8 March 2021.

10 The pros and cons of Afterpay. Emma Duffy, 16 August 2019, https://www.savings.com.au/buy-now-pay-later/afterpay-pros-and-cons-savings-com-au, accessed 8 March 2021. .

11 Minimise your debt pile - starting with your credit card. Joel Gibson, 12 May 2020. https://www.smh.com.au/money/borrowing/minimise-your-debt-pile-starting-with-your-credit-card-20200511-p54rta.html accessed 8 March 2021.

12 Ibid.

Important information and disclaimer

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at June 2021 and may be subject to change. This information may constitute general advice. The information in this article is factual in nature and does not take into account personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way. Subject to terms implied by law and which cannot be excluded, NULIS does not accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.