Buy now pay later. Convenient or costly?

Did you buy anything over the holidays on a buy now pay later plan? You’re not alone. The popularity of interest-free payment options like Afterpay, Openpay, ZipPay, Brighte and Certegy Ezi-Pay has exploded in Australia over the last year.

Once the domain of online retailers, the trend is set to grow with major retailers adding in store payment options to draw in even more shoppers.

How do buy now pay later plans work?

Buy now pay later plans are a hybrid payment plan somewhere between a lay-by and credit card purchase. They are offered when you make a purchase either online or in store. They allow you to buy goods and services, receive them immediately and pay for the purchase over time via regular instalments.

They are like lay-by in that they allow you to split the purchase price of an item into smaller, more manageable repayments. Where they differ is when you can take your item home. With lay-by, you need to pay for the item in full before you can enjoy it. With buy now pay later, you can enjoy your purchase immediately and pay it off over time. It’s a small but important difference that can get impulse buyers into trouble.

Buy now pay later plans are also similar to credit cards in that if you miss a payment or don’t pay off the purchase in the agreed period you may be charged late and/or service fees. These are generally standard fees between $5 and $10 a month and may be recurring until you have made all the repayments. If you attach a credit card to a plan, you may have to pay interest to your credit card provider on the outstanding balance each month. 

What can you purchase?

So far, providers have tended to focus on either small retail purchases or larger less frequent purchases.

For example, providers such as Afterpay and Zip money allow for small credit limits and are used mainly for purchases across fashion, hair and beauty, health and fitness, technology, books and toys.

Other providers such as Brighte and Certegy provide credit limits of up to $30,000. Brighte provides interest-free purchasing plans for solar panels and home improvements while Certegy covers a larger range of goods and services including pest control, plumbers, electricians and even plastic surgery.

The pros

• You get to enjoy your purchase immediately – and worry about making the repayments later.
• Smaller, more manageable repayments – can make it easier for people with a regular form of income to purchase larger items without using a credit card.
• Repayments are interest free – so long as you make them within the agreed timeframe.

The cons

• Buying items you don’t need because you can – and putting yourself under unnecessary financial pressure.
• Losing track of multiple purchases – and devoting too much of your future income to repayments.
• Missing payments and having to pay late fees and service fees – which can add up significantly across multiple purchases and service providers.
• Accessing more credit than you can comfortably repay – by using a provider who doesn’t report credit information while also accessing other forms of credit (e.g. credit cards and personal loans).

Alternatives to buy now pay later

Instead of using buy now pay later plans to make purchases, why not use your desired purchase as motivation to start a regular savings plan? You could save the same amount you would have made in repayments in a savings account and purchase the item later.

Not only will this help you make regular savings a habit, it will also provide an in-built cooling off period while you wait to make your purchase. Many ‘must have’ items become less important while you’re saving up for them. You might also find that you’re less inclined to spend the savings you’ve built up over time on impulse buys as you are more aware of the effort it takes to save that money.