Remember Layby?
The store would hold the item for you (out the back) and you’d pop in every week or fortnight to pay it off in instalments.
Most of us know about the Layby service offered at places like Kmart and Target.
When I was growing up, it was a popular way to purchase an item, especially if you couldn’t afford it right away.
In a funny way, Layby also taught us how to save and how to wait for things.
Then, with the introduction of Credit Cards, our attitude to saving and waiting changed, and the Credit Card influenced a buy now and pay later attitude.
In fact, the Credit Card stopped the waiting altogether.
Buy Now, Pay Later
Over the last few years we have seen massive growth in the “buy now, pay later” sector. The two best known companies in Australia are Zip Pay and After Pay, but there are many others offering similar services.
Why are they so popular?
In essence you walk into a store, see something you like and get it now. You sign up to a fixed term contract (or a line of credit) and get approved on the spot. You then pay it back in regular instalments.
Features of Zip Pay
While each service has different terms and conditions, we decided to look at Zip Pay as an example:
- Interest free repayments
- Loan amounts of $350, $500 or $1,000
- Unsecured loan
- Up to 60 days interest free period
- Fees including a $6 monthly fee and a $5 late fee
- Minimum repayments of $40 per month
Benefits of Zip Pay
- Don’t pay any interest
- Easy to apply
- Automatic repayments by direct debit
- Widely available in Australian stores
- Access to funds immediately
- No establishment or annual fees
Things to look out for
In 2018, ASIC conducted a review into the “buy now, pay later” industry to ensure that the contract terms were fair to consumers.
These services are not regulated under the National Credit Act, so may not comply with the Responsible Lending Laws that banks and credit unions must follow.
They also discovered some interesting facts about the average user.
- 4 out of 10 were students or part-time workers
- 6 out of 10 were aged between 18 and 34 years
- 40% earn less than $40,000 per year
Further to this, the ASIC review reported that “1 in 6 users had become overdrawn, delayed other bill payments or borrowed additional money to cover their buy now, pay later purchases.”
Watch out for fees!
While these services may not charge interest, they do charge fees. However these can be avoided if you understand the terms of the contract.
Like a Credit Card account, there is a billing cycle. This cycle starts from your purchase date and runs until the end of the following month.
This means you have “up to” 60 days to pay it back IF (and it’s a big IF) you buy something on the first of the month. However, it can be as little as 30 days if you buy something on the last day of the month.
If you don’t pay back your loan in full after the fee-free period, you’ll incur a monthly Service Fee. Then, there is a Late Fee if you don’t make a repayment for more than 21 days.
Tips
While these services can be useful, especially in the lead up to Christmas, here are some tips to make sure you are making the best financial decision.
- Read the terms and conditions before signing up and don’t be rushed by the salesperson.
- Make sure you can afford the repayments.
- Avoid the monthly fee by repaying your debt within the fee-free period.
- Before you sign up, walk out of the store, grab a coffee and think about whether you really need the item.
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