What to Know Before You BNPL - NerdWallet Australia

“Buy now, pay later” (BNPL) is a sign of the times. As a society, we don’t just expect everything quickly and easily — we’ll happily pay more for convenience.

In our culture of instant gratification, one shopping trend has gone mainstream — BNPL. In 2020-21, Australians spent $12 billion through buy now pay later services[1].

While it’s good for the economy, is this financing option just as good for our pockets?

What is buy now, pay later?

Buy now, pay later means exactly what it sounds like: you buy something without paying for it upfront and pay for it later through interest-free instalments.

The financing option is offered by BNPL companies, which allows you to purchase a product (online or in-store) and pay it back incrementally, without interest. You get the product and then pay it back, usually in four instalments. It’s essentially an interest-free payment plan.

How does BNPL work?

A BNPL service is comparable to a bank. To use one, you first need to sign up with the company and (upon approval) link your debit or credit card. Then, you’re free to shop within an allocated limit.

After you’ve made a purchase, the company will set up a fixed repayment schedule and deduct what you owe from your card or bank account.

Can buy now pay later affect your credit score?

It depends on which buy now, pay later company you use. AfterPay doesn’t affect your credit score or standing, as they don’t do credit checks. ZipPay, on the other hand, ‘may need to perform credit checks to verify your details and confirm you can make repayments.’

Before you use BNPL, check if the provider requires your credit score. And just like any line of credit, always make payments on time.

Should you BNPL?

What attracts the 5.9 million active users to BNPL? Behavioural economists believe it’s taking away the ‘pain of paying.’ It feels like a psychological ‘win’. A sense of control when we receive that delivery. BNPL is easy, frictionless, and delivers multiple dopamine hits. Much like credit cards, BNPL delays payments (and pain).

If you’re unsure whether BNPL is right for you, consider what you’ll use it to buy. You may benefit from immediate cash flow if it is for an emergency. If it’s not, use a helpful strategy called the “24-hour rule” to short-circuit the spending pattern. It’s simple: Keep the product you want to buy in the cart for 24 hours. If you still really want it the next day, you can buy it with more confidence.

And, as always, be honest with yourself about what you can afford and your money habits before making a financial commitment.

Advantages of BNPL

As with all things in life, BNPL is neither good nor bad. It’s how, and when, you use it that matters.

You won’t pay interest, unlike traditional loans and credit cards.
Hard credit checks are rare and it’s easy to get approved, making BNPL a helpful tool while repairing credit because you won’t have to worry about hard credit checks.
You’ll get extra time to pay for necessary expenses. BNPL makes sense when you need the extra time to pay for an essential purchase you wouldn’t otherwise be able to afford.
Widely offered. Many retailers offer multiple BNPL payment options at checkout, both in-store and online.

Disadvantages of BNPL

If there’s no interest, what’s the problem? Right?

The fees can add up. Just because you don’t pay interest, like with a credit card, doesn’t mean you won’t often pay more than you would have upfront. BNPL providers make their money through fees, and those fees can add up fast.
It’s easy to overspend while using BNPL, which makes it hard to manage multiple repayments.
You’re taking on debt. Though the plan may seem simple and low-cost, you’re still taking on debt, and it’s rarely a good idea to go into debt for a nonessential purchase.
Missed payments can damage your credit. Overlooking a BNPL instalment isn’t uncommon, especially when you’re juggling a few at a time. Any missed payments can affect your credit score, hurting your eligibility for another loan down the track.

Popular BNPL services

Before agreeing to any service, read your obligations to the BNPL provider and make sure you understand the terms, conditions and fees.

Afterpay

Four equal fortnightly instalments over six weeks, $10 late fees, and a maximum account limit of $2,000. Interest-free.

Zip Pay

A credit limit of up to $1,000 and no interest. 0 fees for the first 60 days. No $7.95 monthly fee if the closing balance is paid off each month. Zip Money is available for purchases between $1,000-$5,000.

Humm

Small accounts ($2,000) range from five to 10 instalments. $0 monthly fee for terms of 2.5 months or less. Bigger agreements ($30,000) offer terms up to 60 months, with an $8 monthly fee and a $35-$110 establishment cost. A credit check might apply. 0% interest.

Klarna

A maximum limit of $1,000. Four payments, once a fortnight. Late fees apply. Klarna performs soft credit checks.

LatitudePay

10 weekly instalments, interest, a $10 missed-payment penalty, and a transaction fee for merchants. $1,000 limit on purchases.

Openpay

Weekly or fortnightly payments across two to 24 months. No interest, but the possibility of establishment and management fees. For example, processing fees are $2.50.

Payright

Weekly or fortnightly payments across two to 24 months. No interest, but the possibility of establishment and management fees. For example, a $2.50 processing fee.

Brighte

The BNPL for DIY home improvement projects. Fortnightly payments from six to 60 months. Up to a $30,000 limit for homeowners. No interest, however, account holders are charged a $2.15 weekly fee. $4.99 charge for missed payments. A credit check applies.