What is Buy Now Pay Later?

Whether we like them or not, Buy Now Pay Later (BNPL) platforms have changed the way many Aussies pay for things, but do you even know what they are?
In this blog I’m going to cover:

  • How you can legally take something from a shop without paying for it.
  • BNPL platforms – the new hybrid for the shop-a-holic!
  • The difference between BNPL and lay-by or credit cards
  • How popular are BNPL platforms in Australia
  • How BNPL might affect your credit score.

Have you ever seen that special something that your heart desires, and you instantly decide you desperately must have it now?

But then you check your bank account balance and your heart sinks as you realise your current financial situation means you simply cannot afford it right now, so you run through the following scenario through your head…

“If I go without my morning cappuccino and work extra hours for the next 3 weeks, I should be able to save enough to buy that new shirt. But that’s still going to take 3 weeks until I can buy it and I have that dinner coming up, and I so want to be wearing that shirt. My size sells out fast so it probably will be sold out in 3 weeks!”. FOMO, (the fear of missing out) is real right now as we have all heard about the current supply chain issues, especially in the lead up to Christmas.

Well, if any of this is familiar, BNPL platforms offer a solution, allowing you to take home that something special right now, and pay for it later.

Yep, with BNPL you can take it home today without paying for it, legally!

Buy now, pay later products, like Zip Pay and Afterpay (click here to see the full list and find which is best for you), allow you to make a purchase at a shop or online and receive your goods and services immediately, by paying the merchant on your behalf. Once the merchant is paid, you make repayments back to your BNPL account via interest free instalments over a short period of time.

The new hybrid for the shop-a-holic!

A hybrid isn’t just a car…it’s a thing made by combining at least two different elements. BNPL is the hybrid for the shop-a-holic. It takes the advantages of a traditional lay-by arrangement and combines it with the benefits of a credit card, while eliminating both their frustrations.

What is lay-by?

Lay-by services have been around for a long time and allow consumers who are unable to pay for something upfront to arrange with the shop to put the product aside for them for an upfront fee. The consumer (that’s you) would then make regular instalments over time to pay for the item. Once the total amount, plus any fees, have been paid in full, then you can take the item home.

What’s the difference between BNPL and lay-by?

  • Lay-by is an arrangement between you and the shop; BNPL introduces a 3rd party by being an agreement between you and the BNPL service provider.
  • The BNPL service provider will agree payment arrangements (number of payments and total amount) with you, and once they are approved it will reimburse the shop directly for the full cost of the item you wish to purchase. Because the shop has been paid in full it will give you the item immediately.
  • You then pay back the BNPL provider in instalments (usually over about six weeks depending on your arrangement).
  • So compared to a lay-by, where you can’t take the item until you have paid for it in full, you can now receive the item upfront, before paying anything.

What is a credit card?

A credit card is a way to borrow money or get ‘credit’ from a bank or similar financial institution. It provides you with access to an agreed cash limit as long as you make the minimum payment by the due date each month. The money you access is not yours but borrowed. So, you do need to pay that money back, along with any interest and other charges like an annual card fee. However, there is usually an interest free period during which you won’t be charged any interest as long as you pay all what you owe back within the time period.

What’s the difference between BNPL and a credit card?

  • If you pay for an item by credit card you are borrowing the money from the bank or financial institution that your credit card is linked to, this is similar to BNPL as you get to take the item home before you pay for it.
  • However, unlike credit cards BNPL is interest-free and easy to get, with no lengthy application processes.
  • With BNPL you know exactly how much and how long it will take for you to pay back what you owe.
  • But if you don’t pay back your BNPL purchases on time there are late fees that can end up being more expensive than paying interest.

Are Buy Now Pay Later services new?

BNPL services were first introduced to Australia in 2016. Since then, the BNPL industry has seen significant growth and it is proving to be an extremely popular payment method in the Australian consumer lifestyle. This rapid growth has been driven by numerous factors, including:

  • Growing awareness and confidence in the products, as the Buy Now Pay Later concept is no longer something that’s new and unknown.
  • As consumer confidence has grown more retailers and service providers have become accepting of this method of payment to complete a transaction meaning it is more readily available. In fact, you can pretty much BNPL everything these days, even your pub meal!
  • A changing attitude by consumers towards credit card debt, as consumers become more aware of the impact of credit card fees and interest repayments on their finances.
  • Change in behaviour – we live in a society with an increasing thirst for instant gratification when we want something we want it now. BNPL services certainly cater for that.

How popular are Buy Now Pay Later services in Australia?

In 2020 alone, Australian’s spent over $50 billion in online shopping and one in ten online or e-commerce transactions over that period used a BNPL service.

As always, various reports provide different statistics, but one report produced by the Australian Securities and Investments Commission (ASIC) in November 2020 stated there were over 6 million active BNPL accounts in Australia in the financial year ending 2019. This represents approximately 30% of the Australian adult population, although it is common for individuals to have more than one BNPL account.

Keep an eye out for our upcoming blog to see how BNPL compares to Paypal, and Paypal’s entry into the marketplace.

Do Buy Now Pay Later platforms do a credit check?

This depends. Most people only use BNPL for relatively small purchases (up to a few hundred dollars at a time). In this situation Afterpay currently doesn’t do a credit check on its users, although other BNPL can check your credit score, including:

  • Zip
  • Klarna
  • Latitude Pay
  • Humm
  • Openpay

This means that opening up accounts with BNPL providers can impact your credit score, because they’re making what is called a hard credit inquiry on your behalf. One or two credit inquiries probably won’t have much of an impact on your credit score. However, if you have many credit or loan applications and inquiries over a period of a few months, this can hurt your credit score, even if you don’t end up taking out the loan. Learn More

However, BNPL providers will be required to perform a credit check or similar evaluation on new customers who apply for an account more than $2,000, by using the account applicant’s income and their expenses data or by doing a credit check. Both sources must be checked for spend limits above $15,000.

Want to know which BNPL service is best for you?

NameInterest rate (p.a.)Min. loan amountMax. loan amountEstablishment FeeCredit Check Required?Websites Links
humm ($1 - $1,999)
0%$1$1,999$0 (Up to $90 on bigger purchases)NoGo to siteMore Info
Zip Pay
0%$350$1,000$0 establishment fee. $7.95 monthly fee applies.YesGo to siteMore Info
humm ($2,000 - $30,000)
0%$2,000$30,000$90 ($35 to $90 only applicable when applying for over $2,000.)YesGo to siteMore Info
0%$1$4,000 $2.50 (If you snooze a payment, you will have to pay a fee of $2.50.)YesGo to siteMore Info
0%$35$1,500$0 establishment feeNoGo to siteMore Info
0%$20$500$0 5%NoGo to siteMore Info

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.