Is Afterpay good?
Short Answer: Yes.
Longer Answer: Yes, but.
Longest Answer: Keep Reading…
Table of Contents
What is BNPL?
(Think Afterpay, Zip Pay, etc.)
So essentially, BNPL (Buy Now, Pay Later) is exactly what it sounds like. Rather than paying for a product in full before you are able to take it away from the seller, you are able to purchase the product, use said product and pay that product off with equal payments over a specified forward amount of time.
Growing up, we all had the experience of picking up a layby from Big W. BNPL is similar to a layby, however, rather than paying the item off while it is secured with the seller until fully paid for, we are now able to take and use the product BEFORE we have fully paid it off!
BNPL has made bigger purchases feel more affordable to the everyday consumer as it removes the stress associated with significantly poor cash flow. Rather than forking out $2,000 straight up on a new TV, you can simply pay $500 4 times, coinciding with your paycheck, or rental income, etc.
The other benefit of BNPL is that most providers don’t charge interest. Whilst BNPL services are technically loaning you money, they don’t require you to pay an interest rate on that borrowed money.
Essentially, the BNPL provider holds the burden of you not repaying that purchase. The BNPL provider pays the merchant (seller) in full when you make the purchase, and then it becomes the BNPL provider’s responsibility to follow up on the funds you owe them.
How does Afterpay make money?
Afterpay makes money through 3 different income streams:
- They charge all merchants a flat rate of $0.30 per transaction + an additional 4-6% of the purchase price
- This fee typically works out to be around 5% of the purchase price
- Many critics have claimed that Afterpay’s ‘no surcharge’ restriction has resulted in this 5% increase in price being passed onto all consumers
- They charge late fees – the maximum late fee is $10 for purchases under $40 and $68 for purchases over $40
- They also offer retailers a pay-per-click advertising bundle through the Afterpay app
What are the benefits?
- Multiple payments separated over anywhere from a few weeks to a few years
- Eradicates the requirement to have full amount in cash at purchase date
- Allows for improved cash flow
- Interest-free means it is cheaper to use than a credit card
- Soft credit checks allow for quick and easy sign-up
- Receive item before paid in-full allows consumer to test and return without initial outlay
What are the drawbacks?
- Late fee charged for any, and every, missed repayment
- Late payments and defaults can impact credit score
- Terms and Conditions can be unclear = unexpected fees
- Smaller payment amounts = easy to underestimate the true cost of a product
How can I use it right?
When using BNPL services such as Afterpay, keep the following thoughts at the forefront of your mind:
- Can I afford the full cost of this item? Can I afford it right now?
- If the answer is no, probably worth rethinking the purchase
- Will I use my credit card or debit card?
- If you answer this with ‘credit card’, I bloody well hope you know your interest-free period on that and are able to pay the balance owing in-full by the that interest-free expiry date!
- Will I be applying for other loans any time soon?
- BNPL balances outstanding doesn’t look too good when lenders are assessing whether or not to give you their moeny
- Do I have a budget? Does this purchase fit into that budget?
- If you said ‘no’ to that first question – learn how to budget in this post!
- Do I have any other BNPL balances owing?
- Pay these off first
- Avoid making multiple purchases at one time using BNPL services!
Remember, you have nothing to prove to anyone else. A nice purchase that costs triple the price of something that looks the same but with a different logo isn’t always worth the money…
There we go, an introduction to the BNPL space!
As the title of this post asks, is BNPL as great as it sounds?
I think yes! But, this is only true IF you use it sparingly, with a strong financial backing and without emotion. As soon as you start making impulse purchases with Afterpay, your outstanding balance will grow before your eyes until you’re in that awkward spot where you have to default on those loans… bye-bye chances of getting approved for that mortgage…
I hope this post has helped educate you in some way! If you enjoyed this read, you’ll probably love these too:
- Credit Score Explained: what it is and how it’s used
- The simple difference between rich and poor people
This is not financial advice. Visit the MoneySmart website to learn more!
Stay wise,
Uncle N.