Most Aussies have heard of it, many Aussies even use it, and it’s something we see more and more in stores and online.
Buy now pay later.
And for the most part, if you’re able to use it responsibly, it’s a viable product. But in the context of personal finance, it can impact your financial position more than you think.
Below we explore the ways that Buy Now Pay Later can impact your ability to get a loan or access credit.
Buy now pay later, otherwise referred to as BNPL, is short-term financing where a consumer can make a purchase now and repay the purchase in instalments over a few weeks. Typically buy now pay later services don’t charge interest, instead, you might be charged fees.
Most of us think that when we are assessed for a loan, our credit score plays a big part. And while this is still true, it’s important to know that our conduct on our bank statements also paints a very important picture of how we handle our cash.
When a responsible lender assesses your eligibility for a loan, they look at how you manage your cash. Are you always just managing to scrape through to payday? Can you easily afford your financial commitments with cash to spare? Are there dishonoured direct debits or overdrawn fees? Effectively, they are looking to see if you can afford your current life and the repayments for the new loan or credit facility that you applied for.
The size of your income isn’t necessarily connected to your ability to manage money either. If the majority of your cash is eaten up by Buy Now Pay Later debt, then responsible lenders may worry about your ability to commit to more debt.
To help explain this further, take a look at the below example which compares what your ongoing repayments could be with a Fair Go Finance personal loan as opposed to a number of BNPL facilities.
This highlights how BNPL’s can become harder to manage as well as impact your affordability if you are applying for another credit facility.
|Option 1||Option 2|
|Borrow $1500 using a personal loan over 9 months||Use 3 Buy Now Pay Later Schemes: |
First store – $500 started on the 5th of the month
Second store – $500 started on the 7th of the month
Third store – $500 started on the 9th of the month
|Repayments: $50.04 per week via direct debit||Repayments: Store one – $125 of the 5th and fortnightly after |
Store two – $125 on the 7th and fortnightly after
Store three- $125 on the 9th and fortnightly after
That means $375 will be direct debited from your account every fortnight, on top of your current living expenses.
Using buy now pay later won’t affect your credit report directly. However, if you default on your repayments, the BNPL provider has the right to report this to a credit bureau which can then impact your credit score.
What can affect your credit score is if you’re declined for credit because of your poor affordability thanks to BNPL and so you apply with other lenders in the hope you may get approved. All of these credit enquiries will be listed on your credit report and impact your score.
In Australia, BNPL providers aren’t regulated like banks and other financial institutions under the National Credit Act.
This regulation protects consumers from predatory lending and involves a lender assessing a consumer’s financial situation to ensure they can afford the repayments. And because BNPL providers don’t charge interest, they don’t fall under this legislation, meaning there is no assessment about whether a consumer can afford the repayments.
However, it should be noted that in March 2021 the BNPL providers in Australia signed a code of conduct to help protect consumers from predatory lending.
If you are using Buy Now Pay Later, consider a different kind of credit product that’s regulated. The benefits of this are twofold.
Firstly, by using a regulated credit product, your full financial situation will be assessed to ensure you can afford your current lifestyle and future loan repayments. This is so important; you don’t want to be given a loan or credit facility that you can’t afford.
Secondly, BNPL won’t improve your credit score over time, but a regulated credit product will. Due to the implementation of Comprehensive Credit Reporting, your positive repayment history will start to show on your credit report and increase your score. Basically, a loan from a lender (like us) who has implemented CCR means your credit score will increase just by repaying the loan on time.