Afterpay Pitfalls: What to Watch And How It Could Affect Your Next Loan Application
In 2017, the Australian ‘buy now pay later’ service, Afterpay, made its first foray into the New Zealand market through an agreement with the Trade Me Group. Since then, Afterpay has had a meteoric rise in popularity.
For those of you who aren’t familiar with the service, Afterpay has emerged on the scene as a game changer for both shoppers and vendors alike. Afterpay allows consumers to “buy now, pay later” on both online and in-store purchases. Afterpay has enjoyed huge success in both the Australian and Kiwi markets, however, as its popularity shows no sign of waining, voices of discontent are beginning to emerge.
Before we can explore what has people concerned about Afterpay, we should take a quick look at the features that have made the service so popular:
Afterpay has been praised for how easy and accessible it makes its service to consumers. Instead of going through the same lengthy application process that you might with a traditional lender, customers are able to set up and use their Afterpay account almost instantly.
To sign up to Afterpay, all consumers need is an eligible Mastercard/Visa credit or debit card, an e-mail, and a valid phone number and home address.
As we said before, you can begin using Afterpay pretty much straight away. So, you could theoretically find something you want but can’t afford in a store, sign up to Afterpay, and purchase all within the space of half an hour.
Easy Online Use
Afterpay has been seamlessly integrated within online shopping checkouts. Once you get to the payment screen, you simply opt to pay with Afterpay, and let them take care of the rest. They will sort out the payment plan for you, and send it through to your e-mail account.
It’s (almost) Free
Afterpay aims to make its service accessible to everyone. There are no application fees or interest rates associated with Afterpay. If you make your repayments on time, you only pay back the value of your purchase. There are, however, fees charged for missing payments.
Keep in mind that, after all, Afterpay is a profit-driven business. Behind the ‘good-guy’ facade is still a corporation whose main goal is to make as much money as possible (but more on that later).
Both In-Store And Online
While Afterpay’s bread and butter revolve around the online checkout, they also provide an option for those who enjoy physically being in a shop and able to try things on.
Before consumers head into their favourite store, they must quickly hop on to the Afterpay website. Here they provide their details and select how much they are looking to spend in-store. Once you’re in the shop and found what you want to buy, simply present the barcode on the Afterpay to the cashier. They will scan this and boom – that’s it! You now own that product.
Keep in mind that the payment barcode has an expiry date and can only be used in a single transaction. Additionally, not all retail shops have Afterpay, so check with the store ahead of time to see if you’re able to use it.
Makes Repayments Easy
Often it can be difficult coming up with, and sticking to a repayment plan. Afterpay, however, does this all for you by splitting the bill into four equal fortnightly instalments, which will be automatically charged to your nominated debit or credit card.
Afterpay will email you a copy of the schedule, so you are able to make sure your finances are in order before each repayment schedule. What’s more, if you want to pay it ahead of time, you are able to.
An Alternative To A Credit Card
If there is something you really want to buy but can’t afford, Afterpay may be a good alternative to a credit card because you are able to avoid interest fees.
Afterpay provides an alternative financing option for people who may not be in a position to take out other finance. Additionally, it allows people to afford things they usually wouldn’t be able to purchase.
Sound too good to be true? Well, that’s because it probably is. After all, there are two sides to every coin. Additionally, as Afterpay becomes increasingly popular, other, more traditional financial institutions have started taking notice and shaping their policies around Afterpay, but we will get to that in a second. For now, here are the immediate ‘cons’ to using Afterpay.
Encourages Impulse Spending
Yes, the bane of any budget: impulse spending.
Trying to curb impulse spending is hard enough as it is, but the prospect of interest-free payment plans just makes it even more difficult. Relying on Afterpay for your purchases can lead to very poor spending habits.
Before going ahead with your Aferpay purchase, ask yourself: “If I had to wait four weeks to make this purchase outright, would I still buy it?” If the answer is yes, then sure, buy it. But, if the answer is no, then this is definitely an impulse buy and you probably think twice before buying it.
This being said though if you do make your fortnightly payments without any hiccups, you can avoid having debt and dishonour fees looming over your head.
There Is A Spending Limit
Afterpay uses an automated system to determine how much money you’re allocated to spend over a period of time.
How do they work this out? Well, through a number of different factors. For example, if you have been with Afterpay for a while, and have consistently made your repayments, you will be allowed to spend more than someone who has just signed up to the service.
Perversely, this may actually be a plus for shoppers who do not trust themselves with a big allowance. However, it must be said that if you see this as a plus, perhaps you aren’t suited to a service like Afterpay.
Just like any credit provider, Afterpay charges dishonour fees on missed or late payments. Repeatedly missing repayments can lead to dishonour fees snowballing and becoming a genuine financial burden.
While all customers who meet Afterpay’s application criteria will be approved straight away, Afterpay’s terms and conditions make it known that the company and unspecified third parties may perform identity and payment verification checks on your account.
It Could Affect Your Future Loan Applications
Now, as we mentioned above, the rapid rise of Afterpay has lead other lenders to start taking notice of the service. In other words, your relationship with Afterpay could affect your future applications for finance with these lenders. This has been especially evident across the ditch, where recently, banks have made explicit reference to services like Afterpay when assessing people for loans.
Westpac group, for example, has recently announced a tightening of their scrutiny of digital consumer credit for those applying for a home loan. This is in a bid to improve borrowing standards by getting a clearer picture of a borrowers’ true financial situation.
Amy-Louise Parsons, a 28-year old from Australia, had her home loan application knocked back in December 2018 because of her Afterpay account appearing on her bank statement.
A shocked Parsons was forced to cancel her Afterpay account and prove that it had been closed to her lender before she was allowed to be approved for her mortgage. What makes Parsons’ story particularly interesting is that other than having an Afterpay account, her credit record was immaculate.
Parson’s story is just one of many in a new trend of banks asking to look over at least three months worth of statements with a magnifying glass. This is because, even though Afterpay does not consider itself a credit provider, banks treat it as such.
In a climate where affording your own home is becoming increasingly difficult for young people, this latest trend in Afterpay should not be taken lightly. This is because, according to a study by ASIC, around 60% of ‘buy now pay later’ consumers are aged between 18 and 34-years old.
Terri Unwin, the mortgage broker for Amy-Louise Parsons said that, even if consumers only have a small amount owing to Afterpay, a bank is more than likely to consider it before the loan is agreed.
This is because multiple Afterpay purchases appearing on a bank statement, paint a picture of the type of lifestyle a potential borrower leads, and what type of saver they are. This also extends to other services such as Uber and Uber eats. To provide an example, an Australian woman, Georgina Emanuel, was denied a mortgage because she had too many Uber eats charges to her account. This, according to the bank, painted a picture of a woman whose spending habits would present a risk to the bank.
So, what do these trends in Australia mean for us here in New Zealand? Well, it provides us with a few key areas to be cautious of when using Afterpay:
It May Not Be Credit, But Banks Treat It As Such
Yes, while Afterpay asserts it is not a credit provider, for all intents in purposes, you should treat it as such. This is simply because, if the banks are seeing it as credit, so should you.
Missing repayments on your Afterpay account means more than just a dishonour fee, it could be the difference between being approved for a mortgage or not.
Banks Look At More Than Your Income
As we explored above, the world of the ‘buy now pay later’ economy is expanding rapidly, and banks are changing the way they look at potential borrowers accordingly. With this in mind, before applying for a mortgage, it is in your best interest to paint your spending habits in the best light. This means cutting out services like Afterpay, even if you are regularly meeting your repayments.
This is especially important in today’s climate, where being approved for finance is as difficult as ever. With house prices already skyrocketing, and the prospects for young people owning property shrinking, it is important we stay as informed as possible.
Examples of what loans might cost.
Interest Rate between 1.5% and 20% per month.
$2,500 repaid over 13 months would have 56 weekly repayments of $75.05. Total interest $1702.80. Total amount repayable $4,202.80. This example is based on a monthly interest rate of 9% and an AIR of 108%. WARNING: This is a repayment estimate only. Your lender will determine the exact fees, terms and loan amounts available for you, which may alter your repayments. Annualised Interest Rates (AIR) could be as high as 620.5% depending on your personal situation.
Note, your lender may offer you different terms, fees or loan amounts based on your individual circumstances, needs and their own lending criteria. Please check your contract before signing.