Any keen shopper has probably come across the modern-day lay-buy services available (buy now→pay later).
But buyers beware – the perceived ‘smaller’ cost of instalments over several weeks – may give you a false sense of financial comfort with your new shopping delight!
Afterpay and ZipPay are the two most known in Australia but there are similar options popping up such as Openpay and PayItLater with varying terms and conditions.
Shopping is NOW easier than ever before…
With more stores and major brands offering this service both online and in-store, it’s becoming easier than ever to buy what you want, when you want, and pay for it interest-free at a later date. Well, as long as you pay on time that is!
Popularity has been strong from millennials who comprise 73% of its customer base1. Over 840,000 Australians are now using this “indulge now, pay later” option2.
Afterpay and ZipPay are free services. There are only two costs involved and one of them is the cost of the item you’re buying. The other is a late fee for missed instalments.
Afterpay and ZipPay don’t charge customers to use their services, but rather make money by charging retailers fees (between 4% and 6%) for offering the service. They also make money (approximately 20% of total revenue – according to the Sydney Morning Herald3) by charging customers late fees. These can be hefty over a long period.
Afterpay, ZipPay and the alternatives provide an appealing option for customers with benefits including:
- immediate use
- easy to use
- interest free terms
(It works like an interest FREE loan. You have a lot longer to pay (typically 8 weeks) and you don’t have to pay a cent more than the actual cost of the item.)
- an alternative to using a credit card
- increasing availability instore and online
BUT buyers beware of the pitfalls!
Don’t let your impulse spending get out of control!
This pay-by-instalments-option may seem manageable, but paying smaller amounts over time can lessen the impact of the TOTAL cost, and potentially influence you to spend MORE.
A $25 instalment here and a $50 instalment there can all compound to substantial ongoing regular payments – bundle half a dozen of those together and you could be racking up over $250 of regular (generally fortnightly) payments.
Harvard Business Review has even written about pricing and the psychology of consumption. There is a science behind your spending AND businesses who are good at marketing will use this to their advantage!
Other risks to watch out for when using these types of services include:
Additional fees – Fees are charged to consumers if they fail to pay an instalment (for example if an automatic direct debit fails as a result of insufficient funds or an expired credit card).
Debts – If a consumer accrues a debt to Afterpay or ZipPay, they reserve the right to refer the outstanding amount to debt collectors.
Credit rating – Afterpay’s terms state they reserve the right to conduct a credit history check. A consumer may be reported to a credit agency if they fail to make payments4. ZipPay actually conduct a check on your credit file that gets recorded on your credit report and stays there looking like you’ve taken out a small loan!
This could affect your future borrowing capacity for more important purchases like a property!
According to credit-reporting bureau Equifax, there are two different types of late payments.
Late payment – of more than 14 days past the due date can stay on your credit report for up to 2 years.
Default – a payment more than 60 days overdue and $150 or more can stay on your credit report for up to 5 years.
And then there is serious credit infringement where the lender sends a written notice and contact has not been made to pay the debt. Depending on certain actions, this can stay on your credit report for up to 7 years!
So to help you be in control of your finances, we give you…
Our 3 tips to tame your spending
1. Spend within your budget
The longer you hold an account and successfully repay, the more likely you are to be approved for a higher amount.
PLEASE AVOID the credit limit creep and don’t let instant gratification catch up with you. Spend within your budget.
When it comes time to seek finance for a loan or property, each credit limit can make a difference to your application and your borrowing capacity.
2. Avoid late payment fees
Payments are automatically deducted from your chosen credit or debit card, so make sure you keep up to date with your repayments. Afterpay will send you a reminder, however it would be wise to also set yourself a reminder to ensure you have enough money in your account to cover the payment when it is due.
3. Keep your credit clean
Although customers are quickly approved, third parties such as credit reporting bureaus may check your credit history5.
With the recent tightening of credit and tougher lending criteria, now more than ever it is important to keep a clean credit history and pay your bills on time.
[Your spending habits are now under the spot light – big time- MORE THAN EVER BEFORE!]
The fact is that most of us need to change our spending habits before we get into trouble.
Consider these as a payment option BUT make sure you make payments on time and keep a close eye on the limit of your spending – we don’t want ‘credit creep’ taking over your budget.
If you MUST use this system, we highly recommend you have the payments taken from your DEBIT CARD – NOT CREDIT CARD – to avoid credit card interest accruing and adding even more financial difficulty to your situation.
Need budgeting help? Let us know NOW!
1. launchgroup.com.au media release July 2017
3. Sydney Morning Herald, Afterpay and the US: a match made in heaven, or a potential disaster? September 2018