Buy Now Pay Later: Beware the Burdens

Most of us are familiar with the idea of Buy Now Pay Later (BNPL) transactions offered by companies such as Zip, Afterpay, and Latitude, where you can purchase a product, take it home on the day of purchase, and pay for it in instalments over the coming weeks. But did you know these transactions are not necessarily considered “credit”?

At this time, BNPL services are not required to hold a credit licence and are not subject to consumer protections under the National Consumer Credit Protection Act 2009. ASIC explained that these BNPL products generally fall within the exemptions that exist in the National Consumer Credit Protection Act because of how “consumer credit” is defined within the Act.

Earlier this year, the ALP government advised that it intends to regulate the BNPL arrangements as credit products by mid 2023, but the laws applying to that sector will not be the same as those governing other debts.

Because these lenders are not subject to the responsible lending obligations, they are not required to consider the income or existing debts of customers, and will not necessarily afford financial hardship requests should you be unable to meet your payment obligations.

Concerns are growing for the lack of regulation, the potential for customers to hold multiple accounts, and the ability to create additional purchases with such ease. Consumers are finding they have “blown their budget” for weeks in advance as it is easy to get caught spending more than they can afford to pay, leaving them with no money for day-to-day living expenses or other important financial liabilities such as rent, mortgages or loan repayments.

So why are people using BNPL instead of credit cards? The answer is simple really, people are lulled into a false sense of security in these payment plans because there are no interest rates, so it is perceived that it is less expensive than credit card interest fees. Credit checks do not need to be made, and there is no qualification regarding affordability of repayments. But beware; late or missed payments, monthly account fees, transaction fees and in worst case scenarios collection fees can be unlimited for some lenders. And don’t forget that missed payments will often incur a dishonour fee from your bank as well. Reports suggest that service providers earn a significant percentage of their income from late fees alone.

In addition to this, BNPL services can have a negative impact on your credit rating – even if you have not missed or been late in making any payments. Some BNPL service providers check your credit report when signing up, and some may report your Repayment History Information. Holding more than one account with BNPL services can also have a negative effect on your credit rating, and may make lenders decline other finance for you in the future as it may be perceived that you do not have a higher amount of disposable income for incidental or luxury purchases.

So where do you stand if you are looking at joining with a BNPL service provider? Before joining any BNPL services, be sure to carefully read their Terms and Conditions and check what additional fees may apply before agreeing to anything. Check and see if the lender is voluntarily registered under the Australian Financial Complaints Authority and BNPL Code of Practice to ensure you have some additional protections. Avoid setting up multiple BNPL payments & ensure you have the means to make repayments on time every time before committing to reduce risk of additional fees and charges. Think about how you will use these accounts, and consider if there is a better alternative. If you proceed, consider linking these accounts to a debit account rather than a credit account to avoid additional overdrawing or interest fees.

The contents of this article are general in nature. For advice specific to your circumstances, please contact your legal practitioner.

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