Buy Now Pay Later pros and cons

Thanks to the $25 billion we spend on Christmas as a nation, it’s not surprising that many Australians can expect to have a debt ‘hangover’ that lasts well into the following year. In January 2019, Finder estimated the average Australian was carrying $1863 in post-Christmas credit card debt and more than a quarter of balances wouldn’t be paid off until January 2020. That’s a lot of interest to be paying for your festive splurge on gifts, decorations, food and more.

With Buy Now Pay Later (BNPL) services, buyers can have their item now and spread payment in instalments over a few weeks or months. Unlike credit cards, they charge no interest on the purchase, and there are generally no fees to sign up and use the service. However you may incur fees if you miss a repayment or do not meet the agreed repayment schedule. To offer BNPL users more financial flexibility, service provider humm allow users to shop both the Little Things (up to $2,000) and the Big Things (up to $30,000) depending on their personal needs and finances.

Perhaps this is one reason why we’re seeing BNPL start taking over from credit cards for Christmas shopping. In their 2019 Buy Now Pay Later survey and report, Mozo found more and more people turning to BNPL and getting rid of their credit cards as a result. Over half of respondents said they’ve stopped using credit cards since they started using BNPL. The survey also found BNPL was the most popular choice for Christmas spending, ahead of debit cards, savings and credit cards.

So does it make sense to take advantage of BNPL as a way to manage finances for the festive season? Before you get click-happy online or head to the shops to use BNPL services available in many stores, it’s important to keep in mind how your spending choices could impact your finances when the Christmas celebrations are over, and for months or even years to come.

Don’t get caught out with too many accounts

At a time of year when we feel like being extravagant in our celebrations – from lighting up the house inside and out to special gifts for family and friends – it can be tempting to use multiple BNPL accounts to just keep spending. Before you know it, you’ve got multiple repayment amounts and deadlines into January and beyond. According to the Mozo report, more than a quarter of BNPL users surveyed have between three and five payments on the go at any one time.

“To stay on top of payments it’s important you have a solid idea of your incomings and outgoings in your account and understand when your scheduled payments are,” says Mozo Director Kirsty Lamont. “You will be paying for an item months after you’ve walked out of the store or click ‘buy now’, so it’s crucial to consider the possibility of poor credit ratings and additional costs through late payment fees if you don’t think you can meet your payments on time.”

Late fees can add up

Lamont’s comment highlights two important drawbacks of BNPL which can be easy to overlook when the countdown to Christmas is on and you have a big shopping list to work your way through. In theory, BNPL is a very affordable way to borrow money as there is absolutely zero cost to you, the buyer, as long as you can make your payments on time and in full. But should you find yourself falling behind, you’ll be charged fees for late payments. These can soon add up, particularly if you’re struggling to keep up with your commitment to multiple BNPL service providers and accounts.

The impact of BNPL on future borrowing capacity

Even when you do manage to stay on top of all your BNPL payments, having multiple accounts and payments on the go can still spell trouble for other types of borrowing – like getting a mortgage or personal loan. News.com.au recently reported that credit limits for BNPL accounts will be considered when you’re applying for home finance. And if you still have repayments pending, these can be seen by lenders as an ongoing financial commitment, even if you only have a couple of payments still to make and your account is up-to-date.

“If you’ve made a whole heap of purchases four weeks ago, you’ve still got two more payments to come out,” says Nicole Cannon, founder of mortgage broker Pink Finance. “They will then see two months’ worth of that expense and they will then annualise that expense. That could add an extra $3000 or $4000 to living expenses.”

While BNPL can seem an appealing way to boost your Christmas budget, getting carried away with your spending is bound to have an impact on your finances. Regardless of how you spend, keeping festive finances realistic is going to help you start the coming year without a significant amount of post-Christmas debt to manage.