Millions of Australians are now using ‘buy it now, pay later’ (BNPL) services as a way to pay for their everyday wants and needs.
Companies such as Afterpay and Zip have helped fuel this trend and have become hugely successful due to the promise of instant gratification. Now that consumers are hooked, this means BNPL is here to stay.
Yet seemingly every month there are new stories of financially vulnerable Australians being negatively impacted by overuse of these services.
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What is happening?
Just last week, Scott Pape, The Barefoot Investor wrote “one in six of millennials who use ‘buy now, pay later’ services like Afterpay are in financial strife … getting overdrawn, delaying bills, or borrowing more”.
Like Scott, we have also found many of these BNPL users fall into low-income Australians who are living paycheque to paycheque and are using BNPL in addition to existing credit card and personal loan debt.
The danger for them is obvious – they are already trapped in a debt cycle, and BNPL services make this worse – especially since these repayments services have to be paid off before other debts.
For example, we found that on average half of users with Afterpay transactions have $4,000 of credit card debt and mounting.
These users have four different Afterpay transactions they are paying off and although the transaction amounts are small – these users will effectively pay more by not using the same cashflows to pay off their existing debts such as credit cards.
Reason being companies like Afterpay will hit you with late payment fees if you miss a payment and prevent future transactions if you go further in arrears.
Which means these consumers are choosing to accumulate more expensive credit card and loan debt just to make their repayments to BNPL suppliers.
For example, at a 20 per cent credit card interest rate, a set of BNPL purchases totalling $600 will actually end up costing you $700.
Some will eventually reach out for help to their local charity or financial counsellor or great organisations such as Good Shepherd.
Some are more vulnerable to the danger
Good Shepherd, for example, reports nearly a third of young Australians living below the poverty line are locked in a pay later cycle and they have seen a surge in people coming to them for assistance.
There has to be a better way because these Australians also have low levels of financial literacy and often don’t understand the long term damage they are doing to themselves and their families.
So what is going wrong?
I believe we need to do a better job of educating consumers about the long term cost of using these services effectively as a substitute for credit.
You can’t easily get multiple credit cards – but you can very quickly process multiple pay-later transactions and have a large sum of money to pay off.
And the main reason it is easy to get these transactions approved is that the retailers get paid by companies like Afterpay less a small commission.
Your BNPL “debt” is taken on by the likes of Afterpay – which means you are effectively borrowing from them to pay for your purchases – it just doesn’t seem like a loan because there is no interest rate attached.
So, am I at risk?
If you already have a lot of debt and are on a relatively low income – remind yourself on the interest rates of the other loans which you won’t be paying down every time you make a purchase.
In reality, you will give in to temptation now and then – and that’s fine – but don’t let yourself be hooked by multiple and repeat pay-later purchases – what Scott Pape calls the”marijuana of credit”.
As he puts it “once you get hooked on spending someone else’s money, there’s every chance you’ll graduate onto harder stuff”.
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