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The dangers of “buy now, pay later”

January 30th, 2018

A raft of “buy now, pay later” options like Afterpay and zipPay are giving consumers the opportunity to take their purchases home immediately, and pay them off over time. But, there are downsides that shoppers must be aware of.

Late fees can be costly
Afterpay allows shoppers to link purchases to their debit or credit card. The Afterpay option is selected at the check-out, and from here, the purchase is paid over four equal fortnightly instalments, or in the case of zipPay, shoppers select weekly, fortnightly or monthly repayments.

There’s no cost to sign-up and there are no interest charges. But neither Afterpay nor zipPay are entirely fee-free. If you’re late with a repayment, Afterpay charges a $10 fee followed by a further $7 fee if a payment is still outstanding seven days later. With zipPay, any balance remaining at the end of each month attracts a $5 fee.

These late fees may sound low, but they can be very high relative to the value of your purchases – far higher in fact, than interest on a credit card.
As a guide, the average order with Afterpay, is around $150, which would be paid off over four instalments of $37.50. Missing a payment of $37.50 could potentially attract late fees of $17 – the equivalent of a 45% interest rate. Missing all repayments on a $100 pair of shoes could cost you $68 in fees.

Plenty of shoppers are copping late fees
Afterpay and zipPay make the bulk of their money from fees paid by retailers. Nonetheless, last year, late fees accounted for one-fifth of Afterpay’s revenue[1], which means plenty of customers are copping these charges. And, as payments can be linked to a credit card, some shoppers could be slugged twice, with late fees on the purchase plus card interest.

Debit and credit cards – still the smart way to shop
It makes sense to think about how you pay for purchases.

Your credit or debit card come with scheme guarantees that protect you if the card is lost or stolen. It’s certainly a lot safer than carrying wads of cash, and in the meantime your savings can continue to work hard earning interest.

Your credit card also comes with an individually determined credit limit to ensure you don’t get into financial hot water. That’s very different from the likes of Afterpay and zipPay, which aren’t covered by the National Credit Code, so there is no requirement to check whether or not consumers can afford their purchases.

By paying off your credit card in full each month, it’s possible to avoid interest charges altogether, and if the tab is building, consider switching to a low rate card or take advantage of a balance transfer offer.

This article is brought to you by ME Bank. For more information, please visit www.mebank.com.au.
Members Equity Bank Limited ABN 56 070 887 679.

[1] https://www.afterpay.com/attachment/44/show