Afterpay – Yay or Nay?

Buy now, pay later services might seem like an ideal solution for finding extra Christmas spending money but it pays to know what you’re getting into, as Jarrod Owen explains

Finally, being comfortable discussing your finances is enormously beneficial. Too many adults miss opportunities or get further into trouble simply because they are uncomfortable talking about financial matters.

In a perfect world, we would all have enough tucked away in the savings account to buy the things we need, when we need them.

Life is rarely that simple, particularly at this time of the year. Buy now, pay later services such as Afterpay and zipPay can be an attractive solution for some of those Christmas-related hurdles.

So, are they useful financial services or dangerous debt traps?

The answer is not a simple yes or no, and it all comes down to your situation.

How does it work?

While it’s not necessarily a new phenomenon, the popularity of buy-now pay-later services has boomed over the past year, largely due to the ease of use.

There are already around 10,000 retailers and service providers across the country offering one of these modern-day lay-by services and it’s growing rapidly.

Signing up is an easy process by either creating an online account or downloading an app. Your debit or credit card can be linked to the account, with no credit checks required.

Using them for purchases is dead easy. The app is used in-store and shopping online is not much more than a click.

Each of them differs in their terms of service but the process remains basically the same. A payment is made at the time of the initial purchase (normally about a quarter of the cost) and then interest-free payments are made on a regular recurring basis to pay it off.

The simplicity and interest-free offering make it a compelling option over the credit card. But that’s where the danger lies.

The pitfalls

While they don’t normally charge interest, they do have penalties for late payments that can rack up reasonably quickly if you miss payments.

And if you link your account to your credit card, you are effectively just shuffling debt around.

The horror stories that have surfaced around these types of services often centre on people who have kept their buy-now pay-later account under control by making the regular required payments from their credit card. In some cases, this debt has climbed close to $20,000.

Keeping it under control

These services can be a preferable way to purchase over the credit card. Like all debt though, it requires a little bit of discipline to make sure it doesn’t go from helpful to harmful quickly.

  1. Don’t link them to your credit card. Use a debit account.
  2. Before you buy, factor the repayments into your future cash flow and ensure that you’re confident that you can comfortably stick to the repayment schedule.
  3. Stay on top of the payment schedule to avoid any late fees.

To make a booking with a financial adviser at Fennell West contact us here.

Ryan Fennell, Shane West and Jarrod Owen of The Fennell West Unit Trust trading as Fennell West are Authorised Representative(s) of GWM Adviser Services Limited ABN 96 002 071 749, an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies. Licensee No. 230692. Any advice in this article is of a general nature only and has not been tailored to your personal circumstances. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs.