Buy Now Pay Later THE POSITIVES AND PITFALLS
Buy Now Pay Later THE POSITIVES AND PITFALLS Prepared by Care Goondiwindi Community Legal Service Copyright Care Goondiwindi Limited 2020
“Never spend money before you have earned it. ” - THOMAS JEFFERSON
Things you can do when you’re 18 Drink alcohol Vote Enlist Get married Go to adult prison Enter into contracts Acquire debt
What is a Buy Now Pay Later product? A Buy Now Pay Later (BNPL) product allows you to buy a service or product and pay the full price later or in instalments. Has been called “layby” for the current generation but with layby you only received the product once it was completely paid for. Is generally marketed as charging no interest. Charges account fees or late fees if a payment is missed.
Afterpay Examples of Buy Now Pay Later Arrangements Zip Klarna Latitudepay Laybuy Humm And more … structure and terms vary
Founded in Australia in 2015. Now the most widely used BNPL product in the English speaking world. As of August 2020, it’s shares are at a record high making the company’s worth higher than Coles, Woodside Petroleum or Qantas. It has 9. 9 million users. Afterpay announced a $519. 2 million dollar revenue for the last financial year, almost doubling its revenue from the previous year. 60% of users are between 18 and 34 years old. Afterpay
How it works Afterpay pays participating retailers in full for goods and assumes the risk of collecting from customers, who pay one-quarter of the cost up front and then in three, fortnightly instalment payments. Once you open an account and purchase something four equal payments are deducted automatically every two weeks for eight weeks Customers are automatically approved if they are over 18 years and have a valid credit/debit card they can link the Afterpay account to. Spending limits are generally low at the beginning until a successful payment history is established. No interest is charged. If you fail to pay on time late fees become payable.
So what’s the catch?
Late Fees If a deduction fails, Afterpay will notify you with the chance to use another means to pay. If you fail to do so a $10 fee will be imposed. If you fail to make a payment within seven days, you'll be charged a further $7. For each Afterpay order you can be charged a maximum of one $10 late fee per order. For any order of $40 or above, you can be charged late fees of 25% of the original order, or a maximum of $68 - whichever is higher. Afterpay Review: Costs, features and what to be careful of. . . www. finder. com. au/afterpay 14% of revenue from late fees https: //www. raskmedia. com. au/2020/08/27/your-guide-to-the-afterpay-ltd-asxapt-fy 20 -report/
Less protection from overspending There is automatic approval for people over 18 years with a valid credit or debit card to link to. No credit checks. Consumers can be approved despite little to no income and existing debts. Because no interest is charged, it is not subject to the provisions of the National Consumer Credit Protection Act 2009 (Cth) including protections to try to stop people borrowing more than they can afford to repay. The average Afterpay purchase is $150 Some people delay paying bills or borrow money to pay their Afterpay debt. Afterpay reserves the right to report activity to credit reporting agencies.
Lending regulations have been tightened. Using BNPL could damage your ability to obtain larger loans at a good rate or at all Many lenders consider the prospective borrower’s history with buy now pay later arrangements Use of such arrangements, particularly heavy use, can lead to a refusal of a loan or to tighter provisions including a higher rate of interest being imposed. A refusal of loan can also directly affect your credit rating.
Pros and Cons of Afterpay Pros Cons Available from a large range of retailers Not covered by the National Credit Act Very quick and easy to set up and use Encourages impulse buying No interest or fees if you pay on time Some take out credit cards to pay Creates a payment schedule although you can pay ahead of time if you choose Non payment fees Afterpay or “third parties” may carry out credit checks or access third party databases to verify who you are Potential lenders, including for a home or business, may see you as a bad risk and refuse a loan or charge higher interest rates Does not affect your right to a refund You may be able to avoid interest fees payable with a credit card If you default you cannot buy more until you have paid your debt
BNPL has been called the gateway drug to debt – the concern is that it trains people to rely on credit rather than following a budget and saving for purchases. In November 2018, there was an ASIC enquiry into Buy Now Pay Later schemes which included a survey of BNPL users. ASIC’s report revealed the following indicators of how consumer behaviour is being influenced by this industry: • 81% of users believed it allowed them to “buy more expensive items that I couldn’t afford to buy in one payment”. • 70% of users believed it allowed them to “be more spontaneous when I’m buying goods and services”. • 64% of users believed it allowed them to “spend more than I normally would”. • More than 44% of users had an income below $40, 000. • 55% believed they were spending more on some items than before using BNPL with 15% reporting they spent “much more. ” • 23% made their BNPL repayments using a credit card. Does BNPL lead to bad credit habits?
BNPL – Things to Consider BNPL is seen as a gateway drug for debt, getting people hooked on credit. Because no interest is charged, the National Credit Law, which includes a number of consumer protections, does not apply Some arrangements charge account keeping and processing fees Some take out debt or delay paying bills to pay BNPL debt BNPL providers can report defaults to credit agencies Lenders may consider BNPL histories in assessing a loan application
Steps to Avoid Money Problems
Budget, and Budget Know what you have Know when bills are due and likely amounts Be conservative Keep track of spending Set goals Save for emergencies Review on a regular basis A budget takes self-discipline. Establish good habits now.
Tools and Advice Free budget planning tools and advice are available from many sources including: https: //moneysmart. gov. au/#tools-and-resources - including a budget planner and a comparisons list for superannuation funds https: //www. moneyhelp. org. au/tools-tips/budget-planner/
Discretionary Income Discretionary income is that part of your income which is not allocated towards budgeted expenses such as rent, food or utilities. You have a discretion, or choice, on how to spend it. This can include putting extra money into savings or an emergency fund. Most Buy Now Pay Later purchases are for non-essential items and so should only come from budgeted discretionary income. With many BNPL platforms, it will come from your discretionary income for up to four months. It is easy to forget that you have used up future discretionary income when you have already received the item or service.
Going into Debt This Photo by Unknown Author is licensed under CC BY-SA-NC
Do your homework! It is not always a bad thing to go into debt. Sometimes it is necessary to accomplish an important goal (ie. taking out a mortgage to purchase a home or a vehicle for a job. ) But you need to ask questions. Compare what is offered. You need to do your sums – know what the repayments are and what you can afford to pay. Be conservative. Consider what will happen if things change – it might be worthwhile taking out life or income protection insurance. Know what this will cost. And you need to read everything carefully and get advice if you don’t understand. Don’t let anyone rush you.
What if things go wrong?
Ask for help – earlier the better There are free financial and legal counsellors who can give your advice and help you come up with a plan. You can obtain legal information from your local community legal service at Care Goondiwindi or from similar community legal services. Care Goondiwindi provides other services that may be able to help or they may be able to refer you to someone who can. Services such as Lifeline, the National Debt Helpline and the Rural Financial Counselling Service Southern Queensland offer free financial counselling and planning. Websites such as moneysmart. gov. au have information and suggestions for how to deal with financial issues, including dealing with creditors and who to go to for advice https: //moneysmart. gov. au/managing-debt/problems-paying-your-bills-and-fines
Paying for Help There a number of commercial services that offer help with budgeting, managing debt or dealing with creditors. Be careful about using these. For more information see https: //moneysmart. gov. au/managingdebt/debt-consolidation-and-refinancing or speak with some of the free services listed above and on the site.
Additional Resources ASIC report - https: //download. asic. gov. au/media/4957540/rep 600 published-07 -dec-2018. pdf Senate Fintech Interim report https: //www. aph. gov. au/Parliamentary_Business/Committees/Senate/Fina ncial_Technology_and_Regulatory_Technology/Financial. Regulatory. Tech/I nterim_report About your credit report/rating/repair and making arrangements https: //moneysmart. gov. au/managing-debt/problems-paying-your-bills-andfines
The information in this presentation is by way of general information only. It does not constitute legal advice and should not be relied upon or applied by individuals to their own cases. Each set of circumstances must be looked at individually and you should always seek individual legal advice if you have a legal problem. DISCLAIMER
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