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The Rise of Buy Now Pay Later Services
Move over debit and credit cards; consumers are flocking to Buy Now Pay Later (BNPL) services. Afterpay, Zip Pay, and several similar payment solutions allow shoppers to take home their goodies now while paying them off via a few weekly, fortnightly, or monthly payments. There’s no interest payable as such, although fees are charged for late payments. This new pay layer has revolutionized the way people shop, offering a convenient alternative to traditional credit.
A survey by Mozo reveals that 30% of Australian adults have one or more buy now, pay later accounts, and we’re not afraid to use them. Afterpay, our most popular buy now, pay later service, achieved sales of $4.3 billion across Australia and New Zealand in the 2019 financial year, nearly double its sales of the previous year. With the nation set to splurge around $23.9 billion on Christmas, it’s a safe bet that plenty of that spend will be by buy now, pay later.
But with 60% of those surveyed by Mozo admitting that buy now, pay later leads them to buy things that they wouldn’t have otherwise, it begs the question: how to use this payment option sensibly during the silly season?
Set Your Limits
One of the most important steps in using buy now, pay later services wisely is to set your limits. Make sure you have a budget for your Christmas spend, and use it to help resist the temptation of impulse purchases. Establishing a clear spending limit can prevent you from overextending yourself financially. Consider creating a detailed budget that includes all your expected expenses, and stick to it. This will help you avoid the pitfalls of overspending and ensure that you can comfortably manage your repayments.
It’s also helpful to set limits on the number of buy now, pay later transactions you make. While it might be tempting to use buy now, pay later for every purchase, doing so can quickly add up and become overwhelming. By setting a limit on the number of transactions, you can keep better track of your spending and avoid accumulating too much debt.
Track Your Spending
Tracking your spending is crucial when using buy now, pay later services. Don’t just track your buy now, pay later spending; make sure you review credit and debit card purchases, too. Are you staying within budget across all your spending methods? Keeping a close eye on your expenditures can help you identify any areas where you might be overspending and make adjustments as needed.
Consider using budgeting apps or tools to help you monitor your spending. These tools can provide real-time updates on your financial activity, making it easier to stay on top of your budget. Additionally, regularly reviewing your bank statements and transaction history can help you catch any unauthorized charges or errors.
Avoid Fees
Around one-third of BNPL users have missed at least one payment. While late fees may seem modest, they can add up quickly. To avoid these fees, set up reminders for your payment due dates or enable automatic payments from your bank account. This way, you can ensure that you never miss a payment and avoid unnecessary charges.
It’s also important to understand the fee structure of your buy now, pay later provider. Some providers may charge additional fees for certain services or transactions. Familiarize yourself with these fees and factor them into your budget to avoid any surprises.
Don’t Repay BNPL Loans with a Credit Card
If you don’t pay off your entire credit card bill within the interest-free period, adding your buy now, pay later repayments to the card may see you paying a high rate of interest on your purchases. It’s better to use a debit card or direct debit from your bank account, ensuring there’s enough money in the account to meet payments. This approach can help you avoid accumulating high-interest debt and keep your finances in check.
Using a credit card to repay buy now, pay later loans can also negatively impact your credit score. High credit card balances and missed payments can lower your credit score, making it more difficult to obtain loans or credit in the future. By using a debit card or direct debit, you can maintain better control over your finances and protect your credit rating.
Avoid Buy Now, Pay Later if You’re Saving for a Home Loan
Lenders may look at your use of buy now, pay later as a sign that you don’t have significant savings and are living from payday to payday. The lower your debt, of all types, the easier it will be to get a mortgage. If you’re planning to apply for a home loan, it’s best to avoid using BNPL services and focus on building your savings instead.
Using BNPL services can also impact your debt-to-income ratio, which lenders use to assess your ability to repay a loan. A high debt-to-income ratio can make it more difficult to qualify for a mortgage or result in less favorable loan terms. By avoiding BNPL and reducing your overall debt, you can improve your chances of securing a home loan.
Have a Happy Festive Season
Used wisely, BNPL can help you jingle your bells and put the merry in your Christmas. Just make sure you know what you’re signing up for and that you can meet all of the regular payments. Take care, and you’ll be able to enjoy the start of the New Year without a financial hangover. By setting limits, tracking your spending, avoiding fees, and making smart financial decisions, you can make the most of BNPL services without compromising your financial well-being.
In conclusion, BNPL services offer a convenient pay layer for consumers, but they must be used responsibly. By following these tips, you can enjoy the benefits of BNPL while avoiding the potential pitfalls. Remember, financial discipline and careful planning are key to making the most of any payment option.
