What is a BNPL service?
BNPL stands for Buy Now Pay Later. Some of the big names are After Pay, Klarna and Zip.
Firstly, for all those who aren’t familiar with this term, this is a service that allows you to pay for your purchase in in four to ten instalments. Most of us would be familiar with the concept of lay-by where you make a payment every week or fortnight for 3 months or even 24 weeks as offered by Big W.
The major difference is that for a lay-buy purchase you get the item in your hands only once you have finished your instalments. BNPL lets you pay the first instalment and you can take it home with you!
In recent years, the rise of Buy Now, Pay Later (BNPL) services has challenged the traditional dominance of credit cards in the realm of consumer financing. With the promise of no interest charges, BNPL seems to be a tempting alternative for many shoppers. But does the absence of interest automatically make it a better choice than a credit card, which may charge anywhere from 15% to 23% interest?
In this blog post, we’ll dissect the intricacies of both choices, shedding light on the hidden fees, interest rates, and the importance of understanding the fine print before making a decision.
The Appeal of BNPL:
One of the primary advantages of BNPL services is the absence of interest charges. Unlike credit cards, where carrying a balance from month to month can accumulate significant interest fees, BNPL allows consumers to spread the cost of a purchase over several instalments without incurring extra costs. This feature can be especially appealing to those who want to budget more effectively and avoid the potential debt trap associated with high-interest credit cards.
However, it’s essential to note that while BNPL services may not charge interest, they may have other fees or penalties for late payments.
Users should carefully read the terms and conditions to understand the complete cost structure. The services provided by the BNPL providers are different, so it’s very important that you understand what you are getting into. Some of the big banks have also made a foray into this service and credit card providers like Latitude also offer interest free instalment plans upto 24 months.
So there are plenty of options and you may not have to sign up with Afterpay. Have a look at a couple of websites like Mozo and Canstar to understand the differences. Of course make sure you go to the actual website of the provider as there could be updated terms and conditions.
The Flexibility of Credit Cards:
Credit cards, on the other hand, offer a different kind of flexibility. They provide a revolving line of credit, allowing users to make purchases up to a specified credit limit. While interest charges can be a concern, responsible use of credit cards involves paying the full balance each month, thus avoiding interest altogether.
Credit cards also come with additional perks such as rewards programs, cashback offers, and purchase protection, which may not be as prevalent in BNPL services. For consumers who pay off their credit card balances on time and take advantage of these benefits, the overall value proposition can be substantial.
Considerations for Responsible Financial Management:
Ultimately, whether BNPL is better than a credit card depends on an individual’s financial habits and preferences. BNPL may be a suitable option for those who appreciate the simplicity of instalment payments and want to avoid interest charges. However, it’s crucial to manage payments responsibly to prevent late fees.
For example, for an item that costs $150, you maybe asked to pay 25% upfront and the balance in four instalments on a fortnightly basis. This means you will pay $37.50 on the day you take home the product. You must ensure that your bank account has $28.13 every fortnight so that you are not charged any late fees. Suppose you do not have the funds, you could end up paying $40 in late fee charges alone!.
Ordinarily, using a BNPL provider does not affect your credit score. They do a soft credit check. In case you miss two or three repayments then it suddenly starts to affect your credit score and this could be really detrimental if you intend to take out a mortgage home loan in a couple of years time.
It’s essential to weigh the advantages and disadvantages of both options based on personal financial goals and spending habits.
Hidden Costs of BNPL:
While BNPL services boast interest-free payments, a closer look reveals potential pitfalls. Late repayments can result in fees ranging from $7 to $10, adding an unexpected layer to the seemingly straightforward instalment plans. Users must remain vigilant about meeting deadlines to avoid these additional costs, which can accumulate and impact the overall affordability of the purchase.
The True Cost of Late Payments:
Furthermore, the consequences of tardy payments extend beyond nominal fees. Unlike credit cards, where timely repayment of the full balance exempts users from interest charges, BNPL services can impose staggering interest rates. Research indicates that late payments on small purchases could lead to an effective interest rate of up to 27%. For instance, a $150 purchase could balloon to $190 if repayments are delayed, translating to a significant 27% interest paid to the provider.
Benefits of Credit Cards:
In the realm of credit cards, responsible financial behaviour can yield substantial benefits. Repaying the outstanding balance in full each month ensures no interest accrues. Additionally, credit cards often offer rewards programs, cashback incentives, and purchase protection, enhancing their overall value proposition.
Understanding Consumer Trends:
Research reflects the evolving financial landscape, with 42% of Australians utilizing some form of BNPL service. While this popularity underscores the convenience and appeal of these services, it also emphasizes the need for consumers to educate themselves about the potential pitfalls. The sheer prevalence of BNPL usage underscores the importance of critically evaluating the terms and conditions before committing to either a credit card or a BNPL service.
Fundamentals of Financial Literacy:
Ultimately, there is no inherent flaw in either credit cards or BNPL services. The key lies in comprehending how each works and meticulously examining the fine print before making a choice.
Financial literacy is paramount, and consumers must empower themselves with the knowledge necessary to navigate these financial products effectively.
Creative Alternative Options:
Build Your Own BNPL Fund:
Before signing up for any BNPL service, challenge yourself to put away $20 per week, in six months time you will have $520. You can dip into your own BNPL fund and buy an item for $150 with no fear of interest charges or late fees!.
Delay the purchase by 72 hours:
Mostly when we want to purchase something, it is for the dopamine hit that we crave. Once our purchase is done , we are almost subconsciously thinking of the next sale or item on our wish list. By delaying this purchase by 72 hours, you can determine whether you really need this item or it was just because you were feeling bored or even hungry or thirsty and thought it was a great idea!.
Visit your local Vinnies, Salvos or other thrift stores:
Research has shown that most people use BNPL to buy furniture and whitegoods. You will be surprised at the high quality of some of the furniture in these stores.
You could probably buy the bed from these stores for as little as $200 you don’t have to get the latest bed that’s in the Freedom or Harvey Norman catalogue. Look around don’t just go and BNPL something for $3000 without researching your options first.
Conclusion:
In the ongoing debate between BNPL services and credit cards, there isn’t a one-size-fits-all answer. Each option comes with its own set of advantages and considerations.
While the absence of interest charges makes BNPL appealing, credit cards offer flexibility, rewards, and additional perks like travel insurance etc.
As a consumer, it’s crucial to assess your personal financial habits and priorities to determine which financing option aligns better with your needs and contributes to overall financial well-being. Take time to analyse your spending behaviour and whether you will be disciplined to limit your purchases.