Afterpay pros and cons

Afterpay exploded onto the Australian financial payments system several years ago. Aimed primarily at millennial consumers, it allows buyers to purchases goods today and pay for them in four equal installments. Unlike traditional consumer credit, Afterpay does not charge interest and does not perform credit checks. But be aware of the various pros and cons of using Afterpay.

On the plus side, Afterpay is great if you follow the SmithMoney Stress Free Money, as it allows you to smooth your payments over time. However, if you don’t have your personal finance under control, then it’s a great way of digging yourself deeper into debt.

What is Afterpay?

Afterpay was founded in 2015 in Australia and listed on the ASX in 2016. They operate across Australian, New Zealand, the UK and USA. Their business model takes advantage of a loophole in Australian consumer credit regulations by offering “Buy Now, Pay Later” (BNPL) to their customers. Under current laws, BNPL is exempt from consumer credit regulation, meaning they are not regulated in the same way a bank is.

Historically, many retailers have offered BNPL as a means for consumers to make purchases without the need for a credit card or cash upfront. Typically, this was aimed at consumers without access to credit cards. The retailer held onto the goods until the final payment was made, at which time the goods were handed to the customer. If the customer defaulted on the payment schedule, the retailer returned their money, minus a “processing fee”.

Afterpay took this financial product and turned this on its head. By using technology they quickly approve customers and to allow customers to take goods upfront. They also bear the credit risk that the customer will not pay on time.

Afterpay consists of two business segments, a Pay Now and a Pay Later. The Pay Now segment is a more traditional electronic payment system. It’s the Pay Later segment where the ability to shadow borrow occurs.

Pros and Cons of Afterpay

The Pros

  • The biggest advantage of using Afterpay is that you don’t need a credit check to use the platform. Afterpay (and the other providers) simply link to your existing debit or credit card and charge you by installment.
  • Unlike traditional Buy Now Pay Later, with Afterpay you get your goods upfront. No more waiting for months to collect your goods.
  • It allows people with lumpy cash flows to make large purchases, without having to use a credit card.
  • Getting approved with Afterpay is very quick and easy.

The Cons

  • The biggest issue I see with Afterpay is the ability of consumers to easily borrow more than they could possibly pay back. While they do conduct a pre-authorisation on your account (that is, they check if you have the cash when making the purchase), there is nothing stopping you taking the cash back out again later on.
  • Afterpay also have a very low default rate. Why is this a con? While Afterpay gets their money almost everytime, giving it the illusion of safety, what it doesn’t show is that consumers can easily get overdrawn on their bank accounts or credit cards, incurring large fees.
  • If you already have trouble with keeping your credit card debt under control, then adding more borrowings from Afterpay isn’t going to help things.
  • For a retailer, using Afterpay is expensive, with merchant fees of around 4%. This cost is ultimately passed onto consumers.

Afterpay criticisms

In April 2019, ASIC (the Australian Securities and Investment Commission), was granted Product Intervention Powers (PIP) to apply to the Buy Now Pay Later sector. These powers equip ASIC with the powers to intervene where it identifies a risk of significant detriment to consumers. Afterpay supports more regulation for the industry – a cynic might say that this is a bit rich for a company that was founded on using loopholes in regulations to quasi-lend to consumers. Who benefits from more regulation? The incumbents…. like Afterpay.

Afterpay are also being investigated by AUSTRAC for non-compliance with AML/CTF regulations. While this shouldn’t stop anyone from using them, it just shows that sometimes fast growing businesses don’t get everything right.

Does Afterpay affect your credit rating?

The simple answer is ‘no’, Afterpay does not impact your credit rating. That’s because Afterpay does a soft credit review. Once you sign up for Afterpay and go to make your first purchase, the Afterpay software checks the debit or credit card linked to your account to ensure you have sufficient funds to cover the first payment. This is usually 25% of the purchase price.

Afterpay also check how long you have been a customer for and how much is currently outstanding. Newer customers are limited in the amount they can spend and if you have significant repayments coming up, they may also limit your spending.

Is Afterpay worth it?

Using Afterpay and other Buy Now, Pay Later services depends, like a lot of things, on your circumstances. You have to weigh up the pros and cons of using Afterpay.

If you keep track of your spending, are on top of your credit card payments, but has lumpy income and are looking for a cheap (free) way to borrow, then Afterpay might be the perfect way of making larger purchases.

However, if you’re using Afterpay cause you maxed out your credit cards, then its probably not ideal. Get your spending under control, pay off your debts and stress less about money.

Read this great review on Afterpay in, where I raise similar concerns.

James Scott

James Scott is a personal finance expert with over 20 years experience. He believe that money should not be stressful. By using the Stress Free Money pyramid it helps everyone achieve their financial dreams.

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