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It seems like a shopper’s dream – buy now, pay later. But is it too good to be true?
Services like Afterpay and Zip allow you to purchase goods immediately, while paying them off over time. There’s no doubt they’re convenient – and instantly gratifying. But in a country with the fourth-highest level of household debt in the world1 , what are the downsides for Australians? Here are five possible effects of using a ‘buy now, pay later’ service.
1. You overdraw your bank account
These services give you the option of paying in regular instalments over a set period, with the promise of interest-free payments. Usually these instalments are deducted from the bank account or credit card you nominate. But if you don’t have enough money in your bank account to pay when your instalment is due, your account will become overdrawn. Banks generally charge a penalty when your balance falls below zero, so you could end up paying extra fees to your bank.
2. You borrow money from elsewhere
Because these services give you a relatively short time frame to pay off your purchase, you might decide to meet your obligations by taking out a personal loan or using a credit card. But while this may seem like a quick fix solution, the reality is that Australians have an average credit card balance of more than $3,000 – over half of which is accruing interest.2 This means you could end up paying off an impulse purchase for years to come – and at a much higher final cost.
3. You’re unable to meet your living costs
The attraction of these services is the ability to take home a big-ticket item on the spot. But the lure of smaller repayments can sometimes trick you into buying something you can’t afford. When your repayments are automatically deducted, you may find you don’t have enough money left over to keep up with your bills, rent or mortgage payments – or even food. This can make life incredibly difficult and create significant financial stress.
4. You enter a debt spiral
It may seem like a one-off purchase won’t break the bank – but it’s possible you’ll end up feeling the negative impacts for a long time. Consider this: on taking the item home, you discover that you won’t be able to pay it off in time – but now it’s too late to change your mind. You take out a personal loan, and soon you are paying off interest every week without actually touching the capital. That’s how people become trapped in a cycle of debt.
5. You form poor money habits
An ASIC report released in November 2018 found that more than 2 million Australians had used a ‘buy now, pay later’ service. The same report showed that at 30 June 2018, there was $903 million in outstanding balances.3 Widespread use of these services can encourage poor money habits, normalising debt, and encouraging overspending and compulsive shopping. When these habits become ingrained, it can be difficult to break them – and almost impossible to get ahead financially.
That’s why, when you go to make a ‘buy now, pay later’ purchase, you should take a minute to decide how much this item means to you. Resist the urge to splurge – if you can’t afford it now, wait until you’ve saved up enough to buy it outright. By then, you may find that you no longer want or need it, and you’ll have some extra money in the bank.
Get the right advice
When it comes to making better financial decisions, your financial adviser can lend a helping hand. They can show you how to create a personal budget and grow your savings for the future – without missing out on the things you want now.
Verve Group's financial planning team helps clients across Australia to achieve financial freedom from our offices in Glenelg (Adelaide) and Alice Springs. We can help you too. Give us a call on 08 8120 4877 or check out our website for more.