3 Problems With Buy Now Pay Later

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Buy Now Pay Later (BNPL) services have recently taken the world of commerce by storm. They provide a convenient and affordable way for shoppers to break up payments for certain items, and most charge no interest on borrowed money. Whilst you may be keen to start breaking up your spending, be warned. There are problems with buy now pay later services that may not communicate with you. Vision Property and Finance are putting BNPL services under the microscope to see how their use may negatively impact you and your finances.

What is Buy Now Pay Later?

Buy Now Pay Later is a payment service that is currently provided by third-party fintech companies. These include organisations such as Afterpay, Zip and Klarna. These services grant users the ability to buy certain goods and services in full and pay for them later through instalments over a certain period of time.

For example, if you purchased a $250 pair of shoes, the BNPL provider Afterpay allows you to pay this $250 in four fortnightly instalments. Therefore you would pay $62.50 upfront and $62.50 each fortnight for the next three fortnights. Afterpay and most other BNPL services provide this service for free, however, they do charge late fees or interest on late payments.

The use of BNPL has exploded over the last few years, with more people around the world participating in E-Commerce. As shown below, BNPL in Australia processed over $10bn payments over 2019/2020, with this only increasing in the past year.

Graph 1: BNPL Payments Processed

What are the Problems with Buy Now Pay Later?

There are a few problems with Buy Now Pay Later services that can cause issues for frequent users.

Can Negatively Affect Your Credit Rating

The frequent use of BNPL services can present problems relating to credit risk. When providing bank statements to banks and credit institutions, they are able to see the use of BNPL services. Alongside this, some BNPL providers determine the use of their services as a request to open up a new line of credit, which goes onto your credit report.

To some institutions, this type of spending and undertaking of financial risk could be deemed as being unnecessary and indicative of an individual who cannot manage their finances. Not paying these purchases back on time will even worsen your credit rating. This combined with other factors may prevent you from getting the loan you desire.

You Can Lose Track of Spending

The prospect of breaking up a large expense into smaller ones over several weeks may sound appealing. However, this can lead to you losing track of these repayments. If you buy a $300 jacket in full, you are more aware of the level of that expense in relation to your fortnightly pay check. You may opt against other large expenses for the coming weeks, or work an extra shift to be able to afford this.

A $300 jacket split into one upfront $75 dollar payment using BNPL makes it difficult to mentally account for the actual $300 payment. If you were to pay $300 upfront using BNPL, you have actually spent $1,200. It is just the total of your purchased goods spread out. The inability to mentally account for the total value of the good using BNPL at the time of purchase could lead to you being in a bad spiral of BNPL payments.

Let's not forget about those late fees. Afterpay made ~$520m over 2019/2020, with a large component of this revenue being late fees. With concurrent BNPL purchases running, you may not be able to meet these repayments and will actually end up paying more than the value of the good purchased.

You Could Take on Too Much Debt

To quote JAY-Z, "If you can't buy it twice, you can't afford it." BNPL schemes can lead you to take on more debt than you can actually afford. As mentioned in the earlier example, whilst $300 upfront may be affordable, $1,200 may not be. BNPL schemes can lead to bad spending habits, which could lead to significant debts, which can lead to significant late fees, which worsens debt. This can spiral, and lead to poor financial and social outcomes.

Vision Property and Finance are experts in financial planning and money management for future-focused individuals. If you want to get on top of your money, you can speak to one of our award-winning experts here. Alternatively, you can check out our other money management tips here.


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