Beware of buying now, pay off the “spiral of debt” later. Experts warn it will haunt us long after Christmas
Are you using Buy Now, Pay Later (BNPL) to purchase your Christmas presents this year?
You could be in the throes of a bad debt hangover, financial advisers warn.
In its annual survey, Financial Counseling Australia (FCA) saw a sharp increase in the number of people with bad debts with BNPL seeking help from financial advisers over the past 12 months.
Some of the more popular BNPL companies include Afterpay, Zip Pay, Latitude, and Sezzle.
Eighty-four percent of financial advisers said that about half, most or all of the clients were indebted by BNPL at the time of the survey.
This is compared to 31 percent just a year ago.
And 61% of those polled said most or all of BNPL’s indebted clients struggle to pay other living expenses.
âWe hear from people who have up to nine different purchases now, pay for products later at a number of different companies. And it just becomes unaffordable for them to pay,â said Deb Shroot, financial advisor at the National. Debt Helpline.
âUsually these products are also in addition to a credit card, a personal loan, maybe a few utility bills or a rent.
“It just sends people into a debt spiral.”
Meet Jackie, who needed to fix her teeth
Jackie started using buy now, pay later to pay for things like good quality bed linen and gifts for others.
The disability pensioner missed a few payments and was assessed a late fee of $ 18.
But it was a trip to the dental clinic – which offered BNPL as a payment option – that got her in serious financial trouble.
“The private dentist said to me, ‘You need a few crowns and you need a plaque or basically you’re not going to have any teeth’, and they quoted me for 4,200. $ “, she said.
When Jackie said she couldn’t pay the dental bill, she was told the dental clinic offered BNPL as a payment option with a company she had an account with.
Although she was initially asked to provide a Centrelink income statement when joining BNPL, she was able to increase her spending limit without further control.
A slippery slope
Jackie soon realized she couldn’t afford the repayments and over about six months she racked up around $ 2,500 in late fees.
âI just clicked on the app and the money was there. You’re stuck with the repayment plan,â she says now.
Buy now, pay later, products are increasingly used to pay for everyday items such as groceries, medical and veterinary bills – or just to buy a beer at the pub.
Nowadays, you can even use BNPL to pay for large recurring expenses like childcare.
And anyone can accumulate an invoice. It can be devastating for those who don’t have the capacity to juggle debt with the rest of their lives.
âEssentially, you meet people who are drunk and cognitively impaired who are able to take out a purchase on credit and make a credit decision,â says Deb Shroot.
So what help is there?
If people are having difficulty, they are supposed to be able to access a hardship program so that they can develop a new payment plan.
However, the FCA investigation found that BNPL’s austerity practices were insufficient.
Financial advisers rated Humm’s difficult practice as the worst, at 4.7 out of 10. Zip scored 5.5 and LatitudePay 5.2.
Meanwhile, Afterpay’s Difficulty Schedule was ranked the best, but it still only scored 5.9 out of 10.
By comparison, the big banks score around 7 out of 10 in FCA polls.
Jackie agrees that BNPL’s hardship policies need to be improved.
Although her reimbursements went from weekly to bi-monthly, when she had to make other changes, she said the company did not respond to her phone calls or emails.
It wasn’t until she got help from a financial advisor through the National Debt Helpline that her debt was suspended for three months while her complaint was investigated.
“It’s not like I don’t want to pay it, I just need to pay it as best I can and in smaller amounts because otherwise I won’t have anything. I’m looking for things to sell so I can pay off a debt It’s really difficult, it’s embarrassing, âshe said.
BNPL “out of control”
A whopping 95 percent of financial advisers say BNPL needs to be regulated to protect consumers and should be covered by the National Credit Code (NCC).
Deb says BNPL’s services charge fees instead of interest and therefore are not regulated by the NCC, which covers credit cards, mortgages, personal loans, payday loans, and consumer leases.
Instead, providers BNPL Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright, and Zip Co are signatories to a voluntary industry code of practice.
âFor this reason, if things go wrong, you are at the mercy of the company, remedies are limited. You can only complain to the ombudsman if he’s a member, but it’s voluntary. You don’t have the same protections you would have when using other products, âsays Deb.
Fiona Guthrie, CEO of Financial Counseling Australia, says Australia needs to conduct a specific and independent review of the law and develop appropriate regulation under the National Credit Code.
âWe have to have guarantees around this product, too many people are injured,â Fiona said.
âBecause when you think about it, you can get by now, paying later from a few hundred dollars all the way to $ 30,000. And on the expense, from trendy shoes to solar panels, that’s is just out of control. “
Buy now, pay later defends hardship programs
Zip Co says it performs credit checks on every customer, and 1% of them have missed payments. It has 500 clients on its hardship programs out of 2.6 million clients.
Humm says 1% of their customers have requested financial help and the company makes it easy for them to ask for help.
âOur credit decision algorithm ensures that we only accept customers who can repay their accounts, but we understand that circumstances may change,â he said in a statement.
Afterpay reports that 96% of payments on its platform are made on time, and customers are suspended from service if they make a late payment.
Household debt levels typically increase in the first quarter of the year after people stretch too much during the Christmas season.
The use of credit cards is on the decline and many people are turning to BNPL’s services instead.
Jackie has a warning for people who plan to buy now, to pay for services later to buy Christmas presents that they might not otherwise be able to afford.
“I think they [BNPL companies] sort of target the vulnerable, and as Christmas approaches, people are going to be looking for options to buy for Christmas. “
For Jackie, her BNPL debt is like a dark cloud hanging over her.
“Every day you wake up and think you can’t even afford a cup of coffee. It’s really, really hard.”