Remember the old-fashioned system in which shoppers put products they really like on hold because they can’t afford them? Well, gone are those layby days as we now have buy now, pay later providers such as Afterpay and Zip pay, which lets you have the item you wish to buy straight away. Afterpay, for instance, has taken Australian shoppers by storm, and it’s not surprising – who doesn’t want to get stuff before paying for it.

According to  Choice reports, more than 1.5 million consumers were using Afterpay in February 2018, clocking up some $1.5 billion in payments across more than 12,000 outlets, including Officeworks, Big W, Kmart, and Target. These types of stats prove that Afterpay is clearly popular by Australians, a majority being millennials and Gen Z shoppers. Almost 70% say Afterpay helps them use credit cards less,  so they avoid interest costs and debt traps.

As great as they are, are interest-free buy now pay later services too good to be true? In this article we’re going to do a deep dive particularly around Afterpay itself. We’ll answer questions  such as: can using these payment services like afterpay affect your credit score?  And what about your chances of getting a loan if you use Afterpay? Let’s find out now!

Q1.  Is Afterpay the future of buying?

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Afterpay, a 'buy now, pay later' (BNPL) platform conveniently allows customers to purchase something now but pay for the item over four instalments later. Founded in 2015 in Sydney, Australia, the service allows you to break up payments into four equal instalments — each amounting to 25% of your total purchase. You then have eight weeks to pay the amount back in four instalments with no interest.

Here are some of the attractive features of shopping with Afterpay, which makes it extremely popular for modern customers:

• Automatic deduction - Consumers will normally have to provide credit card or transaction account details when they sign up for Afterpay, which allows the vendor to deduct the regular instalments automatically from their selected card.
• Immediate purchase - You can buy the item and receive it straight away while paying the item off later in fortnightly instalments.
• Interest free terms - The only costs associated to the consumer is the price of your purchase and the $10 late fee (if you don’t  pay the instalment amount on time).
• Accepted at many different retailers - Being fully integrated with an online store’s checkout, Afterpay ensures easy useability. All you need to do is pay with Afterpay at the checkout instead of your standard Mastercard. So, whether it be in K-mart or any other store that uses Afterpay as a payment method at checkout, shoppers like you and me can easily shop now, enjoy now and pay it off later.
• Fast, easy approval process - There’s little to no effort involved in signing up and it can be done in minutes online.
• Same refund process - You can still claim a refund for purchases you’ve made with Afterpay, in line with each store’s refunds policy.
• Excellent alternative to credit card - Credit cards are viewed as costly and risky; thus, millennials turn to paying for products later and purchasing now to manage their finances.
  

However, to use Afterpay:

• Your order needs to be more than $35,
• You have to be over 18,
• You’ll need to have a debit or credit card to qualify,
• You’ll need to be capable of entering into a legally binding contract,
• You’ll also need to make a free account online or via its app if you’re using it in stores, and
• Provide your payment information along with your phone number and email.

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Q2. Does Afterpay affect your credit rating and your ability to get a loan?

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To make it clear, Afterpay does not generally perform a credit check when you apply for an account. However, according to the Afterpay’s T&Cs, it does reserve the right to give reports on “any negative activity on people’s Afterpay accounts including missed payments, defaults, late payments, and chargebacks to loaning or credit reporting agencies. All these are done for the genuine purpose of identifying and evaluating the capability of one making payments as per the schedules with regard to Afterpay orders. Which also means, it might incorporate ordering credit reports, carrying out other capability of repayments as well as verifying information which has been given against the contrary databases of the third parties”. For full details, read on…...

So, how does late payment fees turn to payment defaults and how does this in turn affect your credit score?

As such, while it is known that Afterpay is not conducting credit checks whenever you apply for a loan, it could still use its own discretion to report any negative behaviours to lenders, which obviously in turn may consequently affect a person's credit score. For instance, people who are not meeting the repayment schedules, are charged 14% late fees and a report is given to the lenders concerning an individual's creditworthiness, which also means it may end up on your credit file as payment default. In addition, as a credit score is one of the main factors a bank  consider when assessing your home loan application, the lender may  lose confidence in you if they see that you have a history of payment defaults. It’s like if someone can’t make small payments even on their Afterpay account, what's the guarantee that one can repay substantial loans? So, it may definitely have an adverse impact on your chances of getting a home loan.

Hmmm makes sense… But, how does payment defaults affect my chances of getting a home loan?

Because late payment fees are the result of you failing to make payments on time. This means, for any order of $40 or above, you can be charged late fees of 25% of the original order or a maximum of $68 – whichever is higher. Thus letting it default, such an individual will never appear to be a prospective borrower in the lender's perspective.

And on top of that, if the lender sees that a considerable amount of late fees are never recovered (say you’ve reached a maximum late fee of $68 and still haven’t paid your dues), and such amounts default, reports could be compiled to the credit bureaus. As of the commencement of comprehensive credit reports generated by Afterpay, the repayment history forms a more significant component of credit scores. What is more, Afterpay is often incorporated within the calculation of debt-to-income ratios used by banks and lenders for the overall risk assessment. If a person cannot make manageable payments promptly, this reduces the users’ credit score and hence the perceived creditworthiness of an individual. Likewise,  credit checks are one of the major factors a lenders' uses to understand whether the client qualifies for the applied loan or not plus their ability to repay a loan.

Thus, when a person has bad credit due to defaults or missed payments, then such individuals may have a low chance of having his/her loan approved by the lending agencies.

Tips: here are a few things to look out for that may impact your credit rating so that you can be aware of factors that can stop you from getting a home loan:

• Late payments
• The frequency of late payments
• How late a payment was made
• How often scheduled payments on your account get declined
• How often orders get declined due to insufficient funds on the payment method on-file.

Question to think: Did you know your Afterpay account only appears on your credit history if you have a negative event? This means, closing your account won’t impact on your credit score. That's absolutely right! Even some lenders may ask you to close your Afterpay account. But, if you don’t want to close your Afterpay account, you should be upfront with lenders about how much you owe and your repayments, so that you don’t unnecessarily delay your loan application process. And the rest is up to them to decide whether you’re responsible with money or not.

Q3. What are the obvious disadvantages of Afterpay?

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Love Afterpay? Well, there are many crosses against utilising Afterpay. Here are some of the apparent ones.

Fuelling impulse buying

Platforms like Afterpay encourage impulse purchasing, a lousy habit that  can break the bank and leave you with an item you can’t realistically afford. For instance, a recent ASIC review indicates that in June, 2018 Australians owed a staggering $903m in ‘buy now pay later’ products alone. Even more frightening is that one in six users are reported as incurring fees or defaulting. That's insanely high debts spotted among vulnerable consumers, isn't it!?  

And the obvious reason is because one is capable of taking a purchased item before even putting money towards it. The question you need to ask here is: if you had the cash to pay for the item in 4 weeks’ time, would you still spend the money? The likely answer is no. This means, people are essentially exploiting a loophole in the national credit laws as they think that with Afterpay, there’s no point in doing affordability checks when they can make purchases immediately.

However, as long as you meet the fortnightly repayments and consider what you can realistically spend, you can avoid being trapped in retail debt and be free to enjoy the benefits of this easy payment option. It really depends on how responsible you are with Afterpay when it’s time to pay off for the purchases you made through this service.

Late fees

If you miss your scheduled repayments with Afterpay, you may find yourself with late fees up to 25% of the purchase price or $68 (whichever is lower).

How? Suppose the automatic deduction is unsuccessful, you will be notified and will be provided 24 hours to log into the account and make the due payments. Failure to do so will incur a $10 late fee and if you still couldn't pay the late fees within 7 days, you'll be charged $7 on top. When you miss all repayment deadlines, then you will have to part with $68 for the late fees for the purchases, which total to $300, enormous. This means if you use Afterpay without proper planning to ensure you’ll be able to pay off the debt in time, these fees could lead into a sea of financial bother. Plus you cannot make your next purchase with Afterpay until you settle your outstanding balance. Ouch!

Due to these fees, more customers have been contacting the National Debt Helpline about Afterpay, leading to it being the subject of a new Senate inquiry.

High merchant fees

Even though Afterpay is not charging interest, like there are fees for late payments charged on customers, merchant fees are also charged for the services rendered. According to McGowan (2017), Afterpay charges these merchants at the attune of $0.30 fees on transactions plus the commission of 3% to 7% for every sale they made. This is considerably higher than what most of the banks are charging when it comes to processing other modes of payments. And believe it or not, The overall revenue generated so far by afterpay comes from active merchants, which is over 43,000.

In gist:

• 20% of  people using BNPL services like Afterpay are missing payments, and over 60% of these people missing payments are millennials. Therefore, millennials are disproportionately affected by fees of Buy Now Pay Later services.
• It somewhat promotes bad spending habits as they’re also targeting vulnerable consumers who don’t have money to spend.
• The fees are extortionate when compared to price of product - not appropriate for young buyers if they mismanage and miss payments.

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Q4. Does Afterpay have a credit limit?

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Yes, just as a spending limit, Afterpay similarly has a credit limit, which is calculated through the use of spending limits. Which in turn depends on whether you have linked your Afterpay account to a debit card or credit card. Let’s say you linked your account to a debit card, then you can't have more than $500 outstanding or your next purchase won't go through. However, if you have a credit card linked to your account, then your limit is up to $1,500.

Moreover, as commenced on 23rd April 2020, the maximum outstanding limit is $2,000, which is reserved only for customers who have previously demonstrated strong repayment capability behaviour over time with Afterpay.

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Q5. So, is using Afterpay really a good idea?

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Like any financial product, whether or not Afterpay is right for you will depend entirely on your personal spending habits and circumstances. If you want a flexible payment plan and a fee-free alternative to credit cards, Afterpay may be a great option for you.

However, if you already have trouble paying your bills or keeping track of your spending, Afterpay could make this even more complicated.

Ending tip: Always ask yourself this: are you a responsible spender or a vulnerable shopaholic? Because it is important to make sure you can afford the repayments before making a purchase on Afterpay or any other BNPL services. If you struggle to control your impulsive spending, services like Afterpay may lead to you spending more than you can afford. So, here are 5 easy financial tips to follow so that you can avoid such situations from happening.

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Thanks for reading this blog! If you have any questions on this topic, feel free to reach out to us across our socials and we would be more than happy to help!

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.