The dangers of ‘buy now, pay later’

A raft of ‘buy now, pay later’ options like Afterpay and zipPay are giving the consumers the opportunity take their purchases home immediately and pay them off over time.

But there are downsides that shoppers need to be aware of, which ME outlines below.

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 off 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. A customer who misses all four instalments is expected to pay a total late fee of $68 for each transaction, regardless of the size of the transaction. With zipPay, any outstanding balance at the end of each month attracts a $6 fee.

These fees 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 the 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, late fees accounts for one-fifth of Afterpay’s revenue[1]. So 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

Your credit or debit card comes 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. 

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