‘Buy Now, Pay Later’ seems like the best thing that’s happened to credit since credit cards were invented. And therein lies the BNPL trap.
Many people will happily use BNPL services like Afterpay and Zip Pay without issue for years. They’re the people who can afford to pay for an item outright, but shrewdly choose to delay payment since it’s offered. Why hand over your money to someone else when you can keep it in your own pocket for a bit longer?
That’s because they are seeing a sharp increase in people presenting to their services due to carrying a BNPL debt they simply can’t repay.
FCA’s recent report ‘It’s Credit, It’s Causing Harm and It Needs Better Safeguards: What Financial Counsellors Say About Buy Now Pay Later’ found that 84 per cent of FCA financial counsellors say that at least half of their clients present with BNPL debt.
The unregulated, everyday BNPL trap
It’s little wonder that people fall into the BNPL trap. Unlike mortgages, personal loans, credit cards, consumer leases and payday loans, BNPL services are not regulated by the National Credit Code (NCC). That’s because BNPL services charge ‘fees’, rather than ‘interest’.
“Why should BNPL get a free pass to not abide by responsible lending codes?” asked one FCA financial counsellor.
Why indeed. BNPL are able to use marketing tactics like automatic credit increases that were banned for credit cards years ago via the NCC. The BNPL model almost encourages spending and over-commitment. It’s way too easy to rack up a significant number of BPNL purchases without realising the debt you’re incurring that needs to be paid on time. Once the fees for late payment start rolling in, you’re in the BNPL trap up to your neck.
This is compounded by the availability of BNPL on everyday purchases like groceries, utility bills and medication. “People keep using these facilities to make ends meet and then get trapped in the cycle,” noted an FCA financial counsellor.
“Buy now, PAIN later,” noted another. A pain that most BNPL companies have limited interest in taking away. The FCA survey also found that hardship policies and availability were full of barriers. Companies were difficult to contact, unresponsive and even judgemental.
How to avoid the BPNL trap
If you don’t want to get involved in all of the above, the simplest way is to not use BPNL services. Pay upfront for what you need.
Of course, that’s easy to say, harder to do. If you can’t resist the allure of purchasing something now that you can’t afford until later, at least be sensible about it.
1. Don’t buy what you can’t afford
BNPL may be wrapped up in shiny ‘convenient payment plan’ sheep’s clothing, but it’s still the big, bad debt wolf.
Credit, any kind of credit, is not an instant ticket to a higher pay packet. You earn what you earn; you can afford what you can afford. If you’re not prepared to budget and save to get the things you want in life, don’t buy them.
The good news is, you can learn to budget, save and increase your wealth so you can buy the shiny things. You’ve come to the right place!
If you’re still tempted to get on the BNPL train, read on. Just go very, very softly so you don’t rouse the debt wolf…
2. Only use one BNPL account
Don’t be tempted to open an Afterpay, Zip Pay, Brighte, Klarna, Openpay, Payright… you get the idea… account. Just have one on the go because having multiple accounts can make it really difficult to manage your repayments. Unless you’re really disciplined, it’s also far too easy to rack up debt if you can’t see the total amount in one place.
Plus, you’ll be paying more monthly account keeping fees than necessary. You can find out what those fees are for each BNPL service here.
3. Stick to a limit
Set yourself a ceiling on the amount you can owe via BNPL. Note that it will probably be a much lower amount than the BNPL service is prepared to offer you.
4. BNPL one thing at a time
Most BNPL services will charge you a fixed ‘monthly account keeping fee’ while you owe them money. It can be tempting to put more purchases onto your account to ‘get your money’s worth’, but that makes even less sense than racking up an extra $50 in purchases to avoid paying a $10 delivery fee (we’ve all done it).
BNPL debt is still debt. So buy one thing at a time, paying the debt off in full before committing to something new.
5. Don’t use credit to pay your BNPL instalments
Afterpay will charge you $10 each time you are late with a payment (check the terms for other BNPL services). While $10 doesn’t sound like a lot, it sure adds to the price of the $50 ‘on sale’ pair of jeans you bought on Afterpay. Incurring late fees can also wreck your credit score. Not to mention how quickly those $10 add up if (a) you are late paying more than one Afterpay purchase each month and/or (b) you are late paying more than one payment.
A huge BNPL trap is using credit to pay your BNPL account to avoid the late fees. While Afterpay and other BNPL services don’t charge interest, your credit card company sure does.
Remember, if you can’t make your BNPL repayment, you’re unlikely to make your credit card repayments either. With the average credit card interest rate hovering at a whopping 19.94 per cent, believe me, your credit card is not your ‘get out of jail free’ card.
6. Set up automatic payments
If you set up automatic payments, you won’t be tempted to skip a payment and start racking up fees.
On Afterpay, that’s as simple as entering the details of your preferred payment card under “Add a payment method” in the “Billings” section of “My Account”. When you have an instalment due, they will notify you beforehand so you can make sure you have enough in your account to pay. You can also enter a ‘back up’ credit card that the payment will default to if there is not enough in your primary account.
Note as per above, be very careful of using a credit to pay your BNPL instalments. Make sure the card you’re using to pay is a debit card, not credit.
7. Seek help if you need it
If you feel like you’re already caught in the BNPL trap, seek help.
National Debt Hotline: 1800 007 007