A service that allows you to take home a brand new pair of Nike trainers today, a whole week before pay day? Sign me up, right?
But here’s the thing: you might pay for this ‘buy now, pay later’ debt in more ways than one later.
Yes, I called it a debt because that’s exactly what these services offer. Fast debt.
The lesson plan (lecture free, promise)
I’m not here to take away your Afterpay. What I do want to do, is make sure you know exactly what a buy now, pay later debt is and how it works so that if you do decide to use it or a service like it, at least you’re doing it wisely. We’ll cover:
- What is buy now, pay later?
- What’s the difference between buy now, pay later and lay-by?
- What’s the catch?
- What about the bank?
Notepad and pen out? Let’s get into it.
What is buy now, pay later?
Exactly what it sounds like. A service that allows you to purchase something and pay for it in instalments over a few weeks or months, or longer depending on the provider.
Alternatively, they might give you a set spending limit that requires monthly instalments.
Pay later services have boomed big time and now there’s a whole heap of names out there competing for your debt, including:
- Commbank StepPay
- Latitude Pay
- Payright (this one is generally reserved for bigger purchases like dental work)
What’s the difference between buy now, pay later and lay-by?
They’re similar concepts, but lay-by requires you to make all your payments before you take the item home, rather than just one.
Buy now, pay later allows you to take your item home and start enjoying it right away. Meaning it can be very easy to get caught up in checkout excitement and forget that you do have to pay for it. Which isn’t ideal…Particularly when you have a savings target and are motivated to achieve it.
What’s the catch?
There’s quite a few, actually.
One. The majority of these buy now, pay later services aren’t regulated by credit law. That means they don’t have to check that you can afford the repayments before lending you the money, and they don’t have to offer financial hardship assistance in the event that you can’t.
Two. It can be hard to keep track of when and what your repayments will be, especially if you’re using multiple services for multiple items. It can quickly add up and spiral out of your control. Don’t let the repayments trip you up. Make sure you’re aware of when and what is due, and don’t overextend yourself by purchasing something you won’t have the capacity to repay.
Three. A lot of these services might be interest free, but they’re not fee free. There are consequences for missing payments or making them late.
Four. These seemingly small debts (never forget that they are debts) can affect your savings and also your credit rating. You’re essentially applying for a line of credit with each service, meaning they can reduce your credit rating or score and make it harder for you to successfully apply for loans in the future.
Okay, so what about the bank?
Yes, the banks and other lenders consider these services debts too. Whenever you apply for a loan, they will ask you how much you have owing and how much you are outlaying to them each month.
Remember what we just learnt about the effect these debts can have on your credit rating? Well, a reduced rating will impact not only the loans you can apply for but the interest rate you’ll be offered too. Good to know, huh?
You might not like it, but ‘not worth it’ is my baseline opinion on pay later services. Reason being if you were to ask yourself what sort of products or services you were purchasing through them, I’m guessing the answer would be wants, not needs.
Here’s the thing: our money is overwhelmingly virtual these days. As it becomes less and less tangible – something we can see, touch and feel – it also becomes harder to value, and easier to spend. Throw something like Afterpay into the mix, and we question that spending even less.
By making payment an afterthought, services like Afterpay are essentially peddling short term convenience for long term pain.
It’s kinda the opposite of what you want to achieve with your money. Which is probably more like a little short-term inconvenience for a lot of long term gain.
To increase your savings, here’s what you can do:
- Set aside 10 minutes to make a list of all your current pay later debts and the total you owe.
- Log the instalments into your spending (wants) budget for the next month or two, or however long the service has given you to pay them.
- The next time you’re tempted, stop and ask yourself if the short term ‘convenience’ is worth it. Some good prompts might be ‘Do I really want this?’ (this article might be a good place to start) and if I do really want this, ‘Can I exercise a little patience and buy it on pay day?’