6 things you should know before using Buy Now, Pay Later companies for your holiday shopping

Clara V.
Clara V.Published on 8 Nov 2021

With pressure to buy gifts for what seems like almost everyone in your life, Christmas shopping can be a huge strain on your finances. It’s a situation that makes it easy to make rash decisions - particularly if you’re stretched for money.

To keep up, Australians are using buy now, pay later services and apps like ZipPay, Bundll, Humm, and OpenPay to get an item straight away and pay it later.

While BNPL loans are highly popular and work for most users, there are some consumers who can be worse off after using them. We go through 6 things you should know before you sign up for one of these services, so you can have a better idea about whether or not they’re worth using for the holiday season.

A close up of red and brown paper bags containing Christmas gifts.

First things first, how does buy now, pay later work?

Buy now, pay later arrangements let users purchase a product or service in-store or online, and pay it back in interest-free installments. This means that you receive your item instantly and repay the BNPL provider, not the retailer where you purchased your goods.

To use the service, you sign up and link a debit or credit card to your account. After setting it up, you’re given an account spending limit, a repayment schedule for any purchases you will make, and youcan use the app to manage and make repayments.

When buy now, pay later first gained popularity, it was mostly used for luxury purchases - like those new shoes you didn’t really need but wanted to have right away - but now it’s being used more and more for everyday necessities like groceries, childcare and medical bills.

What to consider before signing up to a buy now, pay later service

1. You'll be charged extra fees to use the service.

Although many BNPL arrangements are advertised as ‘interest-free’, the fees you’re charged to use the service can still add up. For those just scraping by, these fees can be crippling.

These are the main costs associated with buy now, pay later loans.

  • Establishment fee. This is to set up your account, and while plenty of servies don’t charge for this, there are a few that do.
  • Monthly account keeping fees. This is a fixed fee that can be as much as $8 a month.
  • Payment processing fees. Some companies charge up to or around $3 for processing a payment.
  • Late fees. If you miss a repayment, then a late fee can be anywhere from $5 to $15. This may not sound like much to some people, but for some, it’s a large percentage of the purchase price of the item they’ve bought.

You should also consider any bank fees that may be incurred, such as overdrawn fees (if you don’t have the funds in your account to make a repayment) and interest (if you’re paying with a credit card).

You can compare the fees charged by different popular BNPL providers on the Australian Finance Industry (AFIA) website, however you should also check the terms and conditions of these individual companies.

Use a debit card to buy now, pay later.

If you do decide to use BNPL, it’s a good idea to link any accounts you have to a debit card rather than a credit card, so you aren’t slapped with credit interest.

2. Remember that it's easy to overspend.

It’s scarily easy - and even sometimes thrilling - to commit to spending that you can’t realistically afford. That rush of dopamine you get when you swipe your credit card at your favourite store or when a package appears on your doorstep is completely normal, but that great feeling can quickly nosedive when you realise you have to keep paying for something that you already have.

Last year, ASIC did research into the buy now, pay later industry that showed 1 in 5 consumers were missing payments. Missed payment fee revenue for 6 popular buy now, pay later services in the review totalled over $43 million.

Lay-by can be cheaper.

Some retailers offer lay-by for certain products. This means that you can pay for a product in at least 2 or 3 installments, and receive the product when the amount is fully paid. Lay-by doesn’t incur any account keeping or late fees.

3. It can affect a loan application.

When you apply for a mortgage or a car loan, lenders take into consideration the spending you do with buy now, pay later services.

Late repayments can make an appearance on your credit report. Even if you are making your payments on time, banks can consider any kind of BNPL debt you have at the time when making decisions about your application.

4. It can make it more difficult to return and refund items.

A BNPL company may require you to keep making payments on something you’ve purchased until the retailer has processed the return. That means if a retailer is taking a while to complete your refund, or if their customer service team is slow to reply to you, then you’ll still be paying for an item that you’ve decided you no longer want.

Klarna, Afterpay, and other companies let you pause or delay payments in some instances where there’s an issue with the order, but that doesn’t necessarily mean that all of these companies do.

5. Buy now, pay later is a largely unregulated industry.

As they don’t charge interest, BNPL providers aren’t subject to the National Credit Code, which means they don’t have to observe regulations to do with responsible lending and financial hardship associated with the Code.

Most of the largest BNPL companies operating in Australia signed up to a voluntary ‘code of practice’ in March of this year, but these practices aren’t as stringent as those that must be followed by more traditional lines of credit, like credit cards and payday loans.

Because buy now, pay later options are unregulated (well, self-regulated), there’s no assessment of whether you can afford it, so anybody can sign up for an account. It’s a system that can target the vulnerable and those in financial hardship.

Until better regulation is in place to safeguard consumers, the onus is solely on you to protect your own financial health if you use these services.

A man wearing a blue jacket entering his debit card details into his smartphone.

6. A buy now, pay later service isn't obligated to help you when things go south.

Many BNPL arrangements do have hardship services that lend you a helping hand if something goes wrong and you’re unable to make repayments, but they’re not obligated to help you in the ways that regulated financial products (such as those accessed through banks) are.

If you do want to use a buy now, pay later service, follow these tips

  • Stick to a spend limit. This should be based on what you can realistically repay - you should also leave enough wiggle room in your budget for rainy days.
  • Only have one BNPL account at a time. This makes it easier to manage and keep track of your finances, and can also help keep any account keeping fees down.
  • Set reminders for repayments. While some BNPL platforms will send you repayment reminders, setting up your own to ensure that you don’t have to pay a late fee is never a waste of time.
  • Avoid using it for essential bills and hefty, recurring expenses. Utility providers are obligated to offer you support if you’re having trouble paying your bills.

The bottom line

When planning out your holiday shopping, turning to a BNPL loan can be an attractive option for this spend-heavy time of year. While buy now, pay later services are convenient and simple to use, you should read the fine print and consider your personal circumstances before you sign up to ensure that you’re using these services responsibly.

If you've done some thinking and want to go ahead with BNPL, you can read our Buy Now, Pay Later Buying Guide to get more information on comparing services to find one that works for you.

If you’re struggling to pay off debt or need help with managing your finances, you can talk to a financial counsellor. They offer free and confidential advice and support - you can read more about financial counselling at MoneySmart.

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