It’s the millennials’ idea of a credit card – the likes of companies like Afterpay and Zip attract millions of Australians with their policy of buy now, pay later.

It is simple – you could make purchases of up to $1,000 and pay in four fortnightly interest free payments. With limits of up to $2,000 consumers, predominantly millennials, were buying up big.

While the buy now, pay later services have been under scrutiny for the last 12 months, what are the upside and downsides to using this service, especially during the coronavirus crisis?

There will be instances when the washing machine breaks down, or we might need to get a new set of tyres for the car or make an emergency trip to the dentist.

Afterpay stocks plummeted when coronavirus hit, with shareholders worried that the company’s younger clientele would be unable to pay. Millennials are one of the hardest hit groups during the spread of COVID-19.

The company has now reduced the spending limit to $1,500.

Effie Zahos, Canstar’s Financial Consultant and Editor-at-Large said that if consumers are going to use services like this, they should be aware that these are loans.

“Don’t be fooled into thinking that this might be better than a credit card. Buy now, pay later services are loans. And given the uncertainty of the current climate, it’s best the think of other options,” she said.

“My advice in approaching buy now, pay later services is that if you can’t afford it now, you’re not going to be able to afford it in two weeks. Perhaps if you are using it for essential services, and you can be sure you can pay it off, you may want to consider it. But now is not the time to be purchasing a new pair of shoes or some new loungewear using buy now, pay later.”

She has suggested looking at other options like interest free loans or using credit cards with an interest free period. And there are options for people in low income households.

“There will always be that emergency purchase. Maybe the washing machine breaks down and you need to get a new one. For low income earners, Good Shepherd Microfinance offers affordable financial programs of up to $1,500. They offer no interest loans also, for pensioners,” she said.

“But if you can, try and find interest free loans. There are lots of credit cards which have interest free periods. Make sure you look at the interest free period, and the time of your first and last purchase. Because bear in mind, that as soon as you start using the credit card, you’re already behind with payments as these cards come with an annual fee. But regardless of what loan system you are about to use, make sure you have an exit strategy.”

Pros

Fast and easy approval process

Setting up your Afterpay or Zipmoney account is simply and can be done in minutes. What you’ll need to register and start spending is:

  • A username and password
  • Your phone number
  • A verification code sent to your phone number
  • Date of birth
  • Name
  • Bank account details

And the beauty about it is you can set it up online and in store. It’s designed to make it as fast as possible so you can make that purchase immediately.

Interest free terms

As long as you pay on time on your fortnightly instalments, you won’t be hit with interest fees. But, if you do start to fall behind on payments, a $10 late fee incurs, which is a far cry from the 20 per cent that some credit companies are charging.

Staggered payment plan

Versus layby, Afterpay and Zip will take out the same balance every fortnight. If you are someone that is lax with your payments, it will do it automatically for you. Be sure that you have enough money on your credit card or debit card that you’ve nominated. If you do not have enough funds, you will be charged with the $10 late fee.

Good alternative to credit card

A study conducted by Afterpay showed that 37 per cent of millennials are less inclined to use a credit card because they saw them as too risky and costly. The same study also found that millennials are using buy now, pay later products to manage their finances.

Cons

Late payment fees

It has been found that late fees are one of the company’s biggest source of revenues. If you don’t have enough money to cover the automatic payments, you have just 24 hours to log in and pay the amount. Otherwise, Afterpay will charge you a $10 late fee. Another $7 is charged if you fail to meet the repayment within seven days for the due date.

Encourage impulse spending

Because the company has made the set up so easy, it is a perfect platform for impulse shoppers, as you’ve already received it before paying a cent. But you need to ask yourself, do you have the money to pay it off every two weeks?

It can affect your ability for a home loan

Lending requirements have tightened since the Royal Commission and stories have emerged of applicants being denied home loans because they spent too much money on UberEats or outstanding an Afterpay balance. So, while there are no credit checks or does it affect your credit score, lenders will consider it along with your other debts. And this in turn, can affect your risk profile.

You’re spending money you don’t have

As Effie said, if you can’t afford it now, you won’t be able to afford it in two weeks. Only use it when absolutely necessary or for an emergency. If you want to fund the purchase of a new dress or redecorating, think again.

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