Buy now, pay later schemes are on the rise. These schemes allow consumers to buy something – anything from new shoes, homeware to flights – without paying for it upfront. Instead, the cost of the items is spread across 4 to 6 weeks, with the client committed to make regular repayments. Sounds good, right?
However, if you look at the big picture, you can see that you are still taking on debt and that there are penalties if you don’t pay in time.
What’s the appeal?
First and foremost is instant gratification - instead of having to wait for weeks until you have the amount of money saved, you can part-pay and be on your way. When buying online you get instant approval, no delays.
Short term debt can also be easier to manage for some people.
It has a clear appeal for part-time workers or students. It can also help families struggling to meet an expensive bill like school supplies or Christmas shopping, when timing plays a big part.
In Australia, numbers speak for themselves - there are two million people using this type of service, and those customers owe more than $900 million as of June 2018.
What’s the downside?
Debt is still debt and penalties do apply.
As an example, penalties from Afterpay work like this: If you don’t have sufficient funds to make a payment and you miss a repayment on the day its due, you will be charged an initial $10 penalty. If you don’t make the repayment within 7 days, you will be charged a further $7 for every week the repayment remains outstanding.
Miss your repayments for a couple of weeks and can end up with a significant penalty.
Afterpay reported that 24.4 per cent of its revenue in the last financial year came from late fees. The company says they are not looking at ways to make money off the consumer: “Our revenue model is based on retail partners, not on customer debt. We are not like these other companies and that's been a core value from day one," Afterpay executive chairman Anthony Eisen told investors at the company's annual general meeting.
What should one do?
Even if you are fully committed to making your repayments, you are still taking on new debt. And with debt, there’s risk. And there is such a thing as ‘dumb debt’: make sure you have carefully considered your purchase and that you can meet your repayments comfortably.
Do not take on more than one account at a time (some companies will allow you to have up to three accounts). It can be easy for payments to fall through the cracks if you have handling several loans at the same time.
Always ask yourself if there’s another way. Can the purchase wait, or do you really need to have it now? If you know that you are not good at keeping repayments, try to stay away from these options. Only because you can, doesn’t mean you should.