It seems ‘buy now, pay later’ services are cropping up everywhere. Today, you can use these services for everything from retail purchases, like clothing or furniture, to dental care and even restaurant meals. On the surface, these services may seem relatively harmless – you take the items today and pay in smaller, more affordable instalments without incurring interest, but the reality can be quite different.
Here are just a few reasons you (and those you care about!) should avoid using ‘buy now, pay later’ services.
A line of credit by any other name
These services are generally targeted at a younger market who may not have the required income or credit history to secure a credit card, but essentially offer a similar service on a smaller scale. While what they are doing is effectively extending a small loan, they are currently excluded from Australian credit legislation.
This essentially means that they are able to offer customers a loan without checking their credit score or having to ensure they meet the minimum lending criteria that typically apply to credit products. While many of these companies say they use an algorithm to determine a customer’s “credit worthiness”, what this actually means is unclear.
Many are struggling to make repayments
Although there are no interest charges (one of the reasons these services avoid credit legislation) there is a fee system for late payment. With recent reports showing that one in five Australian users are missing repayments, it is becoming a problem. And these fees aren’t designed as a deterrent to late payment; it’s one of the ways the service makes money – so they don’t just want you to be late, they’re banking on it.
A 2018 ASIC report into these services found that, “To make a scheduled repayment on a buy now pay later arrangement, some consumers delayed paying bills, became overdrawn, or borrowed money from family, friends or another loan provider.” The same report also found that many users were younger Australians who described themselves as being in part-time employment or unemployed.
So, what you have is an audience of people who can’t afford it making purchases on these services, struggling to make repayments and going into debt to meet their obligations.
It encourages poor financial decision-making
Even if these services are used ‘responsibly’ and paid on time, the broader concern still exists that they are creating or furthering a culture of living beyond our means. And when you think about someone using these services at a restaurant for an expensive meal because they don’t have the money to pay, when they could have eaten for far less at home, the potential ramifications of this mindset are frightening.
It’s the basis of all good financial decision making – know where your money goes and don’t buy what you can’t afford. My concern is that by targeting a younger audience, these services can set young Australians down a path of bad financial decisions that can affect everything from everyday finances to home ownership and even retirement savings later in life.
Talk to your loved ones
Financial literacy, a good predictor of financial outcomes, is already low amongst young Australians. In fact, according to one study, less than 25% of people under the age of 25 have a basic level of financial understanding.
The prevalence of buy now, pay later is only likely to widen this gap, in my opinion, as these services actively discourage young people from saving. It’s critical to talk to your younger loved ones about finances and help them understand how to have a healthy relationship with money – and using these services just isn’t part of that.
If you want to help them to get on a better financial path, you may also like to check out BeApt, our financial advice service designed to help younger people get in control of their finances, while fitting in with their lifestyle and their budget.
General Advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.