Buy Now, Pay Later: What Kiwis Need To Know Before They Spend
Posted September 2022
Learn more about the risks of Afterpay, Laybuy, and other Buy Now, Pay Later options
Have you seen something you just have to buy recently?
If so, you may have been tempted by Buy Now, Pay Later (BNPL). And you wouldn’t be alone. More and more Kiwis are choosing to buy now and pay later.
BNPL allows shoppers to spread the cost of goods over several weeks interest-free. As long as you can meet repayments on time, the system can be a helpful way to pay for big-ticket items.
But, like all debt, BNPL comes with risk and responsibility. While Buy Now, Pay Later may seem like a good idea at the time, it only takes one missed payment to land your finances in hot water.
Let’s take a closer look at BNPL and how you can avoid negatively impacting your financial wellbeing, and ultimately, your credit score.
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What is Buy Now, Pay Later (BNPL)?
BNPL is like the old school layby system but allows shoppers to take goods home before they’ve paid for them in full.
We have several BNPL platforms in New Zealand which are widely available as a purchasing tool in-store and online. These include Afterpay, Laybuy, Klarna, Zip Pay, Humm and Genoapay.
Depending on the platform, the total cost of the item is split into 4 to 10 payments. You pay the first instalment at the time of purchase and repay the rest each week or fortnight until you’ve cleared the balance.
A retailer can partner with as many BNPL platforms as they like, providing multiple payment options to their customers.
How does it work?
It’s as simple as splitting the total cost of an item into several equal instalments. For example, you purchase a pair of shoes for $120 at an Afterpay-affiliated store. You pay $30 on the day and another $30 every fortnight for the next 3 weeks.
What are the risks of Buy Now, Pay Later?
Like any debt, Buy Now, Pay Later comes with risk.
Understanding the risks will help avoid the slippery slope to long-term debt.
High late payment fees
BNPL platforms make money from the fees businesses pay for their services and from late payment fees. The problem is, BNPL makes it easy to bite off more than you can chew as they don’t check if you can actually afford to make the repayments, and many Kiwis’ fall victim to late payment fees.
One provider, for example, currently charges a $10 late payment fee and a further $7 every 7 days until the payment is made, per order. If your purchase is above $204 - a maximum late fee of $68 may be applied.
Purchase limits encourage overspending
BNPL platforms provide shoppers with a purchase limit, ranging from $1,000 to $10,000 - which can sometimes be beyond their means. Looking at the large sum of ‘available funds’ can make it easy to spend at will, causing people to make a bunch of impulse purchases that they may not have purchased otherwise, and may not be able to repay.
With the instant gratification of taking goods home on the spot (or delivered to your doorstep), shoppers may be prone to spending more than they can afford.
And, with multiple BNPL providers available in New Zealand, it can be easy to get trapped by using more than one, making it difficult to keep track of your outgoings.
Repaying Buy Now, Pay Later with credit cards
One in five consumers use a credit card to make BNPL instalments, essentially using one type of debt to pay another. It’s not ideal. While you may be able to meet your BNPL repayments, you may be left with an unmanageable credit card balance that can incur further fees and interest charges.
Frequently Asked Questions (FAQ)
Is Buy Now, Pay Later a debt trap?
BNPL can be a useful payment tool when used responsibly. Unfortunately, the people who get into trouble with BNPL are often already highly indebted. When you’re already trying to manage debt, adding BNPL into the mix could cause the problem to spiral out of control.
The number of consumers in arrears with BNPL currently sits at 8.9%; the highest in three years.
For this reason, economists are urging more regulation in the BNPL sector.
While BNPL is not a ‘trap’ as such, it can be a big problem for those who have trouble managing debt. As it’s interest-free, many don’t see BNPL as debt. But it is debt, and it will end up in the hands of a debt collection agency if not repaid.
How will Buy Now, Pay Later affect my credit rating?
Your credit rating indicates how reliable you are at meeting your financial obligations. Lenders will look at your credit rating when you apply for any type of loan, be it a personal loan, home loan, car loan or credit card. If you use BNPL, it will be included as part of your credit assessment.
Could Buy Now, Pay Later options like Afterpay or Laybuy help my credit score?
BNPL won’t improve your credit rating, but it may hurt it if you don't make payments on time.
Payments made on time are not reported to credit bureaus, but missed payments are reported. Missed payments can impact your credit score and affect your ability to borrow money in the future, meaning that small purchases can have big consequences down the line. So, before you buy that new pair of kicks using BNPL, ask yourself, can you really afford them?
Are Buy Now, Pay Later options like Afterpay or Laybuy bad for my credit score?
Your credit score is essentially a track record of your income and expenses. Using BNPL frequently or opening too many BNPL accounts may indicate that you don’t have the income or discipline to repay a loan.
Credit scores take spending habits into account, looking at areas where you may be living beyond your means. If you’re a heavy user of BNPL, and don’t meet your payments on time, it may harm your credit score if you don't make on-time payments and make it difficult to obtain a loan approval from lenders.
Does Buy Now, Pay Later show up on my credit report?
Yes, all BNPL accounts show on your credit report. Credit reports are very comprehensive and display all forms of credit, including interest-free credit such as BNPL. Credit reports display a variety of financial information, including:
Repayment history for all lines of credit
History or borrowing and frequency of loan applications
Number of missed or late repayments
All current credit limits
Defaults and bankruptcies in your name
Does Buy Now, Pay Later charge interest?
Buy Now, Pay Later platforms are interest-free but will charge late fees for missed payments. Late fees will accumulate until overdue instalments are rectified.
Provided you meet your repayments on time, you should only pay the retail price for goods. As BNPL platforms make money from merchant and late payment fees, they are quick to charge you for overdue instalments.
Is Buy Now, Pay Later a form of credit?
Yes, Buy Now, Pay Later is a form of credit. BNPL platforms will do a quick assessment of your credit rating before approving your application and offering you a credit limit.
BNPL is a short-term instalment loan, making it a line of credit. Platforms lend you the money to pay for an item and trust that you will repay them within the designated time frame.
Can you use Afterpay or other Buy Now, Pay Later options to pay your bills?
Buy Now, Pay Later is designed as a payment method for in-store or online purchases, but some platforms such as Zip offer to pay utility bills. It’s important to exercise caution when taking out a line of credit to pay bills.
While BNPL may provide more flexibility in paying large or unexpected bills, you need to be sure you can meet the repayment requirements of the BNPL platform to avoid the bill becoming significantly larger due to late fees. If you can’t meet the instalments, it may be better to arrange a payment plan with the utility company.
How do platforms like Afterpay collect debt?
When you sign up with a Buy Now, Pay Later platform, you agree to make repayments on time. You also acknowledge that the platform has the right to appoint a third-party debt collection agency to recover unpaid debt.
While reporting unpaid debt to a collection agency is a last resort for all BNPL platforms, it’s a way to manage unreliable creditors. It also takes the responsibility off the platform’s hands. Once your debt is with a collection agency, your credit score is significantly affected, making borrowing difficult in the future.
So, should I use Buy Now, Pay Later?
No matter how small the purchase, you should always carefully consider your payment options.
Here’s some things to keep in mind to ensure you’re using Buy Now, Pay Later responsibly:
Purchase one item at a time.
Think before you spend and make sure you will be able to meet repayments.
Use BNPL only when it’s essential.
Reduce your purchase limit.
Take a break between BNPL purchases.
Struggling with Buy Now, Pay Later debts?
Get in touch and find out how we can help you with a debt consolidation loan.