Understanding Buy Now Pay Later (BNPL) Services

Buy Now Pay Later, or BNPL, is a payment method that allows you to split the cost of a purchase into manageable instalments, rather than paying the full amount upfront. Before you decide to use BNPL, it's essential to grasp how it works and what factors you should consider.

How Buy Now Pay Later Works: When you opt for a BNPL service, you can buy a product and defer your payment. Typically, you'll spread your payment over several weeks, though for larger purchases, the duration may be extended. The key advantage is that you won't incur interest charges; instead, you'll face fees for using the service.

Numerous retailers offer various BNPL options, and several providers facilitate these services, including:

• Afterpay
• Brighte
• Humm
• Klarna
• LatitudePay
• Payright
• Zip Pay

Some BNPL arrangements are also available through credit card networks like Mastercard and Visa.

Things to Consider Before Signing Up for BNPL:

1. Budgetary Caution: While BNPL can offer convenience, it's crucial to manage repayments alongside your other financial commitments.
2. Overspending Risk: Be wary of overcommitting to purchases you can't afford, as this is easier with BNPL.
3. Accumulating Fees: Keep in mind that fees for using the service can accumulate over time.
4. Payment Management: If you sign up for multiple BNPL services, it can be challenging to keep track of payments.
5. Impact on Loans: Lenders consider your BNPL spending when you apply for loans like car loans or mortgages.
6. Credit Report: Late repayments can negatively impact your credit report, affecting your ability to borrow in the future.
7. Alternatives: Lay-by can be a cost-effective alternative, as it doesn't involve account-keeping or late fees.

Understanding Fee Structures: BNPL services often market themselves as 'interest-free' or '0% interest,' but they do charge fees that can accumulate quickly. These fees may include:

• Late Fees: Incurred for missed or late payments, typically ranging from $5 to $15.
• Monthly Account-Keeping Fees: A fixed monthly fee, which can go up to $10 per month.
• Payment Processing Fees: Some services charge an extra fee, approximately $3, for each payment.
• Establishment Fees: Some services require a fee to set up the account, with fees reaching up to $110 for certain providers.

To compare fees charged by different BNPL providers, you can visit the Australian Finance Industry (AFIA) website. Additionally, keep in mind that you may also encounter bank fees, such as overdrawn fees and interest charges if you're paying through a credit card."

Buy Now, Pay Later (BNPL) Process

The BNPL service is a straightforward and convenient process. There are two main types of BNPL: those with interest and those without.

The key distinction is that customers may incur charges if they fail to make timely payments. Here's a step-by-step breakdown of how BNPL works:

1. Select Your Items: Begin by choosing the items or service you wish to purchase.
2. Checkout with BNPL: When you reach the checkout point, opt for the "buy now, pay later" option.
3. Down Payment: BNPL applications may require you to make a small down payment, typically around 25% of the total purchase price, if you meet the eligibility criteria.
4. Instalment Payments: After the down payment, you'll need to pay the remaining balance in manageable instalments. Importantly, there is no interest charged for this purchase.
5. Payment Methods: You can make these instalment payments using your bank account, credit card, or debit card.

Examples

Let's explore a buy now, pay later scenario to gain a better understanding of the concept:

Example #1

Imagine Calvin, a music producer, is in need of new studio equipment but currently lacks the necessary funds. His friend Alexa introduced him to buy now, pay later services. Calvin discovered affordable equipment from a merchant on the recommended e-commerce platform. Consequently, Calvin chose the "buy now, pay later" option during the checkout process.

He was granted a small credit facility for 30-45 days, allowing him to acquire the microphone. For a total cost of $600, Calvin made a down payment of $150. Over the installment period, he must pay the remaining $450 to the BNPL provider. It's important to note that if Calvin fails to make these payments on time, he may incur late fees from the lender.

In comparison, had he chosen to use a credit card, he would have incurred additional charges (interest), which is not the case with BNPL.

For more details on the buy now plumb later, please call our friendly team on (02) 9784 2444