What is a "Buy Now Pay Later" service?

Depending on the participating retailers, what you can buy through a BNPL platform can range from clothing to furniture and appliances. However, the BNPL service provider may put spending caps in place, ranging from a few hundred dollars to tens of thousands, to reduce your risk of accruing debt. 

When you pay for a purchase using a BNPL service, you typically agree to repay the service provider in regular instalments (typically fortnightly), similar to a short-term loan except that you may not need to pay any interest. You may need to link your bank account - using your debit card - or your credit card to the BNPL service before you can make purchases. 

A BNPL service offers several benefits compared to credit cards, but it also has some drawbacks and is not a like-for-like alternative payment method. The advantages offered by a BNPL service over the usual credit card include:

• Interest-free repayment: The most significant advantage of BNPL over credit cards is that they do not charge you interest on your outstanding balance, although you will be charged late payment fees if you do not make repayments in time. However, if you repay the debt owed to the BNPL service provider using a credit card, you may be charged interest by the card-issuing company if you cannot repay your card debt in full by the deadline.
  
  
• Simpler application: Applying for a BNPL service can be as simple as downloading the provider’s app, compared to jumping through eligibility hoops with a credit card. Note that BNPL service providers do have some qualifying criteria, such as requiring customers to be older than 18.
  
  
• No credit check required: BNPL services in Australia are unregulated, although the larger service providers have signed up for a voluntary “code of practice”. Per this code, purchases valued under $2,000 do not typically require a credit check, but you must be 18 years or older to use a BNPL service. 

However, signing up for a BNPL service may not help you improve your credit score, nor can you earn reward points or perks similar to those offered by credit card companies. Also, credit cards are usually accepted by many more retailers, especially if issued in partnership with more popular companies like MasterCard and Visa.

BNPL service providers typically require little documentation and do not always charge interest, which has attracted many people. They offer an alternative to the traditional lay-by method since the buyer can own the products right away, even without paying for them in full. On the other hand, they may be more affordable than using credit cards, which may charge interest at high rates. 

Further, a BNPL service can be customised for your financial situation, both by setting up borrowing limits and through their varying loan repayment terms and schedules. If you do not want to risk your credit score, you could opt for a lower transaction amount, which would also make repayments easier. 

The growing popularity of BNPL services has also made them a viable payment option for retailers, which further increases customer convenience. Given that most BNPL service providers do not charge interest, you only have to repay the actual amount you borrowed as long as you do not miss any repayments. However, while using a BNPL platform may not directly impact your credit score, you may find lenders reluctant to let you borrow money if you have outstanding BNPL debts.

BNPL services vary depending on the provider and can be tailored to suit a range of financial needs. You should compare different BNPL service providers before signing up with any provider and make sure you understand the terms and fees accurately. Some of the crucial factors you should consider comparing include:

• Fees: BNPL service providers may charge a range of fees even if they don’t charge interest, some of which can be avoided if, for instance, you make repayments on time.  You should check if you can find a provider who doesn’t charge you account-keeping fees and lower your costs further.
  
  
• Credit limits: Like credit cards, each BNPL service offers customers different transaction amounts based on their suitability as a borrower. You could opt for a lower transaction amount if you want to control your spending or have a low spending budget. For instance, if you’re only looking to make small purchases online, such as clothing, then choosing a provider that caters to big-ticket purchases may not suit you.
  
  
• Credit checks: Typically, a BNPL will not perform a credit check on its applicants. If you’re applying for a BNPL service because you have no or poor credit history, then you should check which providers require a credit check to assess your suitability.

To sign up with a BNPL service provider, you may need to download their app and provide the required information. You may be asked for proof that you are older than 18 years, your contact details, including mobile phone number and email address, a billing address, and account information for repayments. 

Your information will be used to assess if you are suitable for the BNPL service, which also involves confirming that you can make a payment within 25 days of receiving the product or service you purchased. Some providers may also request information regarding your income and regular expenses to determine a suitable spending limit and repayment term.

While you can request a specific spending limit, the BNPL service provider may require a credit check if the limit exceeds a certain minimum. Also, the provider may refuse your request or offer you a lower limit if they consider you a risky borrower. 

Remember that a credit check can show up on your credit history, but you have to permit the service provider to access your credit report. Also, although the code of practice adopted by some Buy Now Pay Later companies only came into effect from March 2021, the assessment criteria apply to existing customers as well, such as when they request a higher spending limit.

Your BNPL service provider will likely ask you to link a debit or credit card before approving your purchases, apart from checking whether you can pay at least the first instalment within the stipulated time. 

However, if you miss a repayment, you will be charged a late payment fee calculated as a percentage of your outstanding balance and subject to an upper limit. If you missed a payment because your bank or credit card company declined the payment, you might also have to pay a dishonoured payment charge. Consider checking the late payment fee amount when comparing different BNPL companies.

You should keep in mind that BNPL services are effectively credit transactions, and the service provider can report missed repayments to one of the main Australian credit reporting agencies. This can negatively impact your credit score and remain listed on your credit history for a while, affecting your ability to apply for other forms of credit as well. 

For this reason, using more than one BNPL service at the same time is not recommended, and you should aim to minimise the number of ongoing debts to keep your credit score healthy. 

Using a BNPL service need not always mean taking on unmanageable debt, and you can set yourself purchasing targets to keep your use moderate. Some of the steps you can take to use a suitable BNPL service include:

• Reading the terms and conditions thoroughly and finding out about all the fees charged.
• Setting strict spending limits that ensure you can repay your debt using your income and not take on more debt.
• Not linking your credit card to your BNPL platform, especially if you can’t pay your balance in full each statement period. Instead, consider linking your  debit card or bank account and ensuring you have enough funds.
• Using a single BNPL platform and making just one purchase with one repayment plan at a time.
• Avoid impulsive spending by sitting on purchases for at least 24 hours.

However, if you do face financial hardship or are unable to keep up with repayments, you should reach out to the provider immediately. Each BNPL platform may have its hardship policy specifying the kinds of financial support available, but you can also call the National Debt Helpline or speak to a financial advisor.