Buy Now Pay Later – the Bad, Bad and very ugly

Buy now, pay later (BNPL) offers are increasingly popular, we get it – its simple and easy and if you have the cash anyway why not use them and keep your cash for now? For larger transactions they kind of make sense (think large dental or other extraordinary expenses), and aren’t much different to a credit card. In fact because they are paid off in a number of weeks they could even be slightly better than a credit card which can carry debt indefinitely and cost a bunch in interest….but we still don’t like them for a number of reasons – and neither does your lender.

At their inception BNPL offered a simple means to spread your bills across a number of weeks with no impact to your credit history (no credit checks), and you were encouraged at every checkout to use the facility. (not mentioning the fact that we have licensing regimes to offer you something more valuable like a home loan but without any credit training the cashier is happily signing you up for debt here).

The challenge comes in a number of forms:

1. Lenders don’t really understand them – while they are essentially a laybuy if they show on your statements they want to treat them as a credit facility – even more so if you regularly use them, it kind of goes to “how much can this person really afford if they’re always buying on credit”

2. They now come with credit checks and credit limits – and this is treated exactly like a credit card so it is calculated as a limit in assessing what you can afford and also included in “debt to income” ratios which limit your borrowing. Credit checks also means impact on your credit score.

3. Having multiple purchases or facilities simultaneously can mean repayments are impossible to handle. We have seen clients with multiple repayments which have consumed all of their spare income until the purchase is paid off, but by then they needed another facility to help them eat or meet their daily bills and the cycle starts again – these can easily get out of control and especially when there is no assessment to confirm you can afford it. A bundle of tiny commitments still gets on top of you if there are enough of them.

4. And if you do miss payments the fee is high, there has to be money in it for the provider somewhere

5. The purchase limit and types of purchases you can make is ludicrous. The first time I saw them advertised to purchase a pizza really drove home how bad these can be.

Essentially they are encouraging additional spending, and maybe on items you might not have bought without the facility and cashier encouraging you, and maybe they are also going to make you stress out trying to manage them in the coming weeks or months… and maybe it might stop you from something you’d really like to do like buy a nice home to live in.