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With the cost of living increasing, there has been an increase in the number of Australian’s using ‘Buy Now, Pay Later’ (BNPL) schemes to purchase essential, everyday items such as groceries. These schemes – such as Afterpay, Klarna, Humm and Zip Pay – allow Australians to spread the cost of their purchases over multiple payments, but receive the goods they are purchasing immediately, unlike more traditional lay-by offerings.

BNPL is often promoted as a cheaper alternative to credit cards, but new research from Curtin University and Financial Counselling Australia shows it could end up costing you more than if you used a credit card to make the same purchase.

The study compared late fees and account-keeping fees of BNPL providers, with the annual interest rate of a typical credit card. It found that a person struggling to make repayments could be charged fees equivalent to a credit card interest rate of 28.28% for Afterpay and 49% for Humm. This is significantly higher than the average interest rate of 22% on a typical credit card.

More than 38% of Australians have used a BNPL service, with more than 5.9 million active accounts currently registered. And according to Klarna, their users shop 20% more often, and purchase an average of 45% more per transaction.

Key considerations for Buy Now, Pay Later

Whilst there are some benefits to using BNPL services, including; being easy to use with no application process, availability when shopping online and in-store, and being interest-free,  there are some very important things to consider before using them:

  • BNPL could make it easier to overspend, especially if you make multiple BNPL purchases at the same time. Ask yourself, can you really afford it?
  • Know what fees you’ll be charged for using the service if you fail to make a payment deadline, and think about how this will impact your budget if you must pay them.
  • Be aware that late payments or accrued debts can be recorded on your credit report and reported to debt collectors. This will impact your credit score and could affect your ability to borrow money in the future.
  • Consider that lay-by and other payment methods could actually be cheaper, and be less detrimental to your overall financial health.

Managing your BNPL services

If you do choose to use a ‘Buy Now, Pay Later’ service remember these top tips:

  1. Use a debit card, not a credit card, for your repayments. Unless you pay your credit card off in full each month, you could end up paying added interest.
  2. Clear your payments ahead of time, if you’re able, so there is no chance of missing one and being hit by the fees.
  3. Stick to your budget. If you haven’t created a budget for your household yet, take a look at our guide for help getting started.

If you’re experiencing financial stress or struggling with BNPL debts, please call the National Debt Helpline on 1800 007 007, or visit the Financial Counsellors Association website to find a financial counsellor within WA. The MoneySmart website also provides helpful resources on debt, budgeting and other financial matters.