Our grandparents saved for their purchases, our parents used layby, and this generation… well it’s the credit generation of buy now pay later…
When you think about it we have been using a buy now pay later for large purchases for generations. When you purchase a car or a home more often than not, a loan accompanies the purchase complete with the accompanying compound interest. Most people understand the basic concept of borrowing to purchase, so why is this so bad now that this has filtered down to being used at a smaller purchase level?
Blake Wisz (Unsplash)
So how does it all work?
These schemes basically allow you to sign up and in the case of some immediately approve you once your identity has been verified which is simply a cross check to Facebook, linked in or PayPal accounts (yes its really that simple!) Some of these services are not required to conduct a credit check when you apply or join. You can buy the item you want and pay it off under the terms of the buy now pay later arrangement, simple right?
When used correctly and within your means these credit options can be appropriate, however, if you overextend yourself with these facilities it can impact on your credit rating or can reduce your serviceability (your ability to pay) a new loan in the eyes of the lender (alarm bells!)
How can buy now pay later schemes affect you long term?
If you over extend yourself and you are unable to pay the agreed upon repayments you may be charged with additional fees and costs, or in the terms of some, interest after the interest free period is over.
If you intend to go for a loan for a car or a home, your buy now pay later obligations may be included in your cashflow which can affect your ability to service your loan, this may mean that the bank may decline your application.
In some circumstances if you miss a payment the provider may report the negative activity to credit reporting bodies and leave negative impact on your credit score.
How can you use Buy now Pay later schemes, effectively and responsibly?
First and foremost the question your purchase before you make it. Do you need this and can you afford it? Consider the impact the repayments may have on your cashflow in the repayment period, if you are worried whether you can afford it look at your budget! Only have one buy now pay later account – make things simple for yourself, having one account will be easier to track and will allow you to monitor your budget and spending Set up reminders for your payments, as most of these schemes will automatically deduct the amounts from your account, make sure there is sufficient funds in the account to pay it! Link the account to a debit card, not a credit card. If you link to a credit card you are essentially robbing Peter to pay Paul, this may mean that the benefits associated with interest free options such as buy now pay later will be negated by the interest that your credit card may charge. Always understand clearly your repayments and obligations by reading all the terms and conditions associated to the scheme that you have subscribed to, understand before you agree!
What are some of the options, how do they work and most importantly how much do they cost?
Afterpay is a common buy now pay later option that is available for both online and instore purchases. It can be used for purchases up to $1,500. It works that when you buy an item today you will have 4 instalment payments to due every 2 weeks to pay off the item. If you are late paying for an item you’ll be charged another $8 or 25% of the purchase price whichever is less.
For example; Anna buys a dress for $40 on Afterpay. She makes the first payment of $10, then 2 weeks later she is unable to pay the next $10 payment. She pays the 2nd instalment but it is 10 days late, then she continues to pay the rest of the repayments on time. How much will the $40 dress cost?
$40 – dress
$8 – late fee
$8 – 2nd late fee for not making payment within seven days of the payment schedule
Anna’s dress costs her $56 not $40.
Zip Pay is another common buy now pay later scheme for purchases under $1,000. You can make a purchase today and choose how you would like to repay the purchase. You can choose weekly, fortnightly or monthly but the minimum monthly payment is $40. This account has a fee free period of 60 days, at this time if you have not paid your balance in full you will be charged a flat $6 service fee. Zip pay also have a late fee of $5 after the fee free period when you have made no repayments for more than 21 days.
For example; Sarah buys a blue tooth speaker for $200. She elects to pay off the purchase in $25 fortnightly payments over 8 payments. Sarah pays her first 5 repayments as scheduled and then does not make a payment for 3 weeks (21 days) when she pays the final amount. How much does the $200 speaker cost?
$200 – speaker
$6 – monthly fee as over 60 days
$5 – as no payment was made over 3 weeks
Sarah’s speaker will cost $211 not $200.
ZipMoney – is a buy now pay later scheme associated with ZipPay but is for amounts that are over $1,000. This option has a contract that will indicate the interest free period you will receive and you need to be approved by Zip Money to access this payment option. There is a monthly fee of $6 and has minimum 3 month interest free period. There is a dishonour fee of $5 if scheduled payments are rejected or dishonoured. Once the interest free period expires, interest will default to the standard annual percentage rate on the outstanding balance, this is currently 19.9%!
For Example; Matt purchases furniture for $1200 under ZipMoney. He is scheduled to make 12 payments of $100 per month. Matt pays all of his payments on time and is never late with a payment, how much does the $1,200 of furniture cost?
$1,200 – furniture
$72 – $6 x 12 months monthly fee
$74.61 – Interest of 19.9% after 3 months
Matt’s furniture will cost $1,346.61 not $1,200.
Whilst I am not a big fan of these schemes and how accessible they are, particularly to our millennials, I do understand the purpose and benefits associated. Weigh it up before you use them, compare what other options you have. Don’t get yourself in hot water, be savvy! You control your money!
We can assist you in creating strategies for better savings plans and debt management. Thinking of using a “buy now, pay later” facility and want some advice – give us a call! 07 3211 8600 or send us an email email@example.com