It’s such an enticing phrase that when presented with these words at the online checkout, many of us select this option. It enables you to purchase a product or service immediately, while promising to pay it off over a payment plan that generally spans about 8 weeks. Essentially, it embodies the popular and common Millennial phrase “that’s a problem for future me”, encouraging us to spend more in the present moment and worry about the payment later.
Whilst we’re neither criticizing nor endorsing this payment method, we recognise there are many common myths that surround this payment plan that require putting into context.
Keep reading to see 7 myths we’ve compiled and busted below.
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It can affect your credit score
Yes and no. Your credit score will only be negatively impacted if you default on your payments. The bank assesses all forms of spending to determine if you’re eligible to borrow now or in the future, regardless of whether it’s via ‘pay later’ services, your credit card or cash.
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There are many fees
Something that people are often wary of is when a service seems too good to be true and assume there must be hidden fees. However, when it comes to these services, there are no application fees, yearly fees or interest rates. And there’s even a cap on the late fees charged when payment is missed. Meaning, you won’t accrue an increase in late fees if a payment is missed. However, according to The Financial Review, 95% of ‘buy now pay later’ clients haven’t missed a payment. As long as you ensure your savings account has an adequate amount of funds when the direct debit arises, you will avoid these unnecessary bills.
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It could put you into credit card debt
‘Buy Now, Pay Later’ providers are not affiliated credit card companies. If you link your debit card rather than your credit card, money is automatically deducted from your account, resulting in no further debt. When you link your repayments to a credit card and then don’t pay the credit card, then yes of course it will accumulate more debt. However this is the same in any purchase circumstance, not solely to do with pay later services.
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Unsafe level of protection
In Australia, an industry code of practice exists containing clauses to ensure that if financial difficulty arises for a customer, the provider will offer hardship assistance. It also enforces upfront assessments, which means providers perform background checks to determine a customers repayment capacity prior to the lend.
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They encourage too much borrowing and spending
Most of the ‘buy now, pay later’ service providers will reduce your buying power or freeze your account if you happen to default on your scheduled payments. You can’t continue to borrow as there is a limit on how much you can accrue, with most of these services capping this at A$2,000.
Alternatively, even after you have defaulted on one or more payments, credit cards allow the consumer to continue to borrow funds. A 2018 study conducted by Canstar recorded that the average credit card limit was $9,100, therefore a $2,000 limit through a buy now pay later service will prevent your debt from skyrocketing.
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It encourages people to stop saving and rely on credit
There are many unexpected circumstances that occur in people’s lives where it’s just not viable to rely on your savings account. People who have limited funds, due to being a University student, being made redundant or going through hardship, such as an unexpected illness or injury, may use a ‘buy now pay later’ service. The most important factor here is to recognise that this reliance is temporary and when the consumer has the money, they promptly pay off the remainder of their borrowed balance.
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It can be a budgeting tool
Having a payment plan enables consumers to be aware of exactly how much money will be deducted from their account each fortnight. You’ll be aware of some of your expenses ahead of time, meaning you can then predict and plan for how much you should save. For example, if you budget $100 a month for clothes and a something you desire comes to a total of $250, you can use a ‘buy now pay later’ service to purchase the item, whilst still sensibly remaining within your desired budget.
To summarise, using credit can certainly ease our immediate financial strain, but like any other financial tool, it’s imperative that we understand exactly how the service works. When it comes to finance, tools will always have advantages and disadvantages, however finding ways to align these services with your financial goals will allow you to both increase your knowledge of the tool, as well as use it to your utmost advantage.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
