The pros and cons of ‘buy now, pay later’

Buy-now-pay-later services have been around for a few years now with Afterpay and Zip Pay being two of the most popular in Australia. If you haven't used this type of service before, buy-now-pay-later allows consumers to do just that – make a purchase now and pay for it later. More specifically though, customers are able to make purchases by only paying a portion of the total price at the time of the transaction, with the rest paid in 3 or 4 instalments.

The option to only pay a fraction of the price up front with interest-free payments can be extremely attractive to a lot of people, but there are a few things to be aware of that could impact you long term.

Buy Now Pay Later pros:

Simple set-up and approval

Setting up an account is extremely easy, only taking a few minutes. Once set up, you're ready to go with no approval waiting times. Buy-now-pay-later providers are also fully integrated within an online store's checkout. Customers simply need to select the provider they hold and account with to complete the transaction rather than entering card details.

Interest-free payments

Perhaps one of the most popular drawcards of buy-now-pay-later services is that most providers don't charge any interest on the amount you borrow - only fees if your payment is late. 

Paying in installments

If you need something now, but don't have all the funds, the ability to make payments in installments can be helpful to those who don't have a regular cash flow or may not want to pay such a large sum up front.

Buy Now Pay Later cons:

Automatic payments

Unlike personal loans and credit cards, most buy-now-pay-later services don't allow you to choose what day you make your payments. While they will create a repayment plan so you know what day payments are due, you might not always have the funds available if it doesn't aligned with when you get paid, potentially risking late fees and affecting your credit score.

Late payment fees

If you fail to make your payments on time it's no surprise you'll likely incur late payment fees which can vary depending on the provider. If you've made too many purchases you might find yourself trying to juggle multiple repayments all with different due dates and amounts, leaving you with a few more late payment fees than you might have expected.

It's easy to get caught up in the moment when things feel affordable at only a fraction of the total cost, but it's important that what you buy is still going to be affordable in the coming weeks when your next payments are due.

Credit rating impact

Buy-now-pay-later providers are a bit different from most other credit providers as they don't fall under Australia's National Consumer Credit Act which protect consumers through assessing their suitability for a credit product, such as a loan, and ensures ethical and professional standards in the finance industry.

Being exempt from this Act means buy-now-pay-later services are not subject to responsible lending standards (responsible lending ensures you as a borrower are protected from loans you cannot afford to repay) like with other forms of personal loans and credit cards. For the everyday consumer this means the buy-now-pay-later provider doesn't need to make a credit check when deciding to lend you money.

While not having this marked on your credit score could be seen as beneficial to those who use the service responsibly, if you're someone who has a history of bad credit or trouble making regular repayments, the lack of protection could cause considerable damage to your credit score and financial wellbeing.

In July 2022, the Australian Treasury sought feedback on the future framework for buy-now-pay-later, acknowledging the need to improve upon the current regulation of consumer credit in Australia. While a course of action is still being considered, it's likely changes will be made that will ensure appropriate consumer protections are in place.

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Published: Thursday, 27 Apr 2023