Beginner Guide to
Buy Now Pay Later
“Buy now, pay later” financing is a great option for those who want to make a big purchase but don’t have the funds to pay for it all at once. Learn more about it by reading this blog post. We’ll explore different types of options and how they work.
What is buy now pay later loan ?
The buy now, pay later (BNPL) facility allows you to put down 25 percent of the cost of an item and walk out of the store with it. The remaining amount is settled in three or four installments. BNPL has been around for decades in New Zealand. However, its popularity exploded during the COVID-19 pandemic-imposed lockdowns in 2020. Cash-strapped shoppers took up to it because it allowed them to spread out the payment obligations without incurring any fees.
There are two primary BNPL options:
- Shopper interest loan
- Merchant transaction fee loan.
A third party offers the shopper an interest loan at the point of purchase. The customer walks out with the item but eventually settles the total cost with interest. Critically, the merchant does not incur any charge. The merchant transaction fee loan, on the other hand, does not charge the customer any interest but obliges the merchant to cover a transaction fee.
How does buy now pay later schemes make money?
There are a few ways that buy now pay later schemes make money.
- The first is through late fees and interest. If you don’t pay off your balance within the agreed upon time frame, you will be charged late fees and interest.
- The second way is through merchant fees. When you use a buy now pay later service, the merchant you’re buying from will pay a fee to the company.
- The third way is through annual fees. Some buy now pay later schemes will charge an annual fee to use their service.
Pros & Cons Of Buy Now Pay Later
Easy to Set Up and Receive Approval
BNPL companies thrive on the high smartphone penetration in modern markets such as New Zealand. Setting up an account is straightforward and only takes a few minutes. Unlike credit cards, BNPL firms do not perform credit checks on applicants. Signing up is relatively easy after downloading the app. You simply create a username and accompanying password and add your contact, date of birth, name, and payment particulars.
Flexible Payment Plans
Another advantage is the lenient payment plans. Shop now pay later platforms to recognize that some consumers can afford to buy a particular item but do not have the total amount needed at the checkout. They smoothen your purchase by splitting the cost of the item into several tranches. The first installment is paid at the store, while the rest are deducted from your debit or credit card. Depending on your provider, these payments can be spread out over a generous period. If the item is a capital good, you can use it to generate income that you can then use to make the rest of the payments.
Afterpay apps do not levy any interest on the amount you borrow to purchase an item. They only start charging fees when you default on the payments agreed upon. This plan means that you are not charged any interest as long as you can pay the installments when they are due.
BNPL has also helped firms reach a previously unattainable demographic. Price-conscious customers who are highly averse to credit cards and would rather save up the whole amount are now embracing the buy now pay later arrangement. They are confident that they can start deriving the benefits of a good without worrying about monthly interest payments.
Cons Of Buy Now Pay Later Schemes
Defaults Affect Your Credit Score
The shop now pays later arrangement is ideal when you have the cash to meet maturing obligations. However, if it reaches a point where you miss a payment, and the app applies a fine, this information is filed with credit bureaus. When the BNPL company makes several filings, this activity impairs your credit score. Lenders view you are a high-risk client and either deny you credit or charge obscenely high-interest rates to cover your subprime status.
Encouraging Impulse Purchasing Behavior
The greatest risk BNPLs pose their capacity to embolden impulse buying. Shoppers only need to put down a small down payment and walk out with the item. A significant number of customers cannot afford a specific good, yet they are eager to attain it by going the BNPL route. This convenience is perilous because it could lead you on an impulse-buying path that leads to a vicious debt cycle.
Late payment Penalties
BNPLs get most of their income from penalties for late payments. They are quick to impose a fine the second you default on a payment. These penalties eventually add up and can equal the value of the item purchased under that arrangement. If you fail to act on the late fees, the company sells off your account to a debt collector.
Ho To Get The Best Out OF BNPL Schemes
Shop now pay later services work is ideal for those who have a pressing need for a relatively expensive item but do not have the needed amount to purchase it. You can take advantage of BNPL by purchasing a capital good, say a commercial grill, and using its income to pay the maturing obligations.
When To Use Buy Now Pay Later Schemes
Any financial planner would tell you to avoid BNPL if you harbor an impulsive shopping streak. If you can tame that beast, the buy now pays later no credit check option can be immensely helpful. The best time to use it is when purchasing higher-cost items that are already in your medium-term financial plans.
For example, if you have planned to replace your two-decade-old refrigerator that consumes 1,500 kWh of electricity annually with one that consumes only 400kWh.
BNPL makes sense. If you make that purchase with your credit card, your credit limit will reduce significantly, affecting your score. Importantly, you should limit the use of BNPL to purchases that carry a low risk of damage, theft, and malfunction since the arrangement has limited consumer protections.
You can also use buy now pay later services to replace items you own and are easy to sell in the secondary market, such as smartphones and laptops.
How To Avoid Traps with Buy Now, Pay Later Services
Understand How BNPL Works
A firsthand understanding of how a product works is the first step to deriving maximum utility from it. Appreciating how the buy now pay later model works is critical to appreciating the methods the platforms use to trap subprime users. Payments are typically split into four. The first is settled at checkout, and the rest are spread over six weeks, meaning the whole amount is paid in two months. With this knowledge, you can plan your purchases accordingly. You should also be aware that BNPL apps do not report good customers to credit bureaus. As such, if you intend to build your credit score, it is advisable to go for other alternatives such as secured credit cards.
Read the Fine Print
Like with any credit facility, the temptation to splash out on unnecessary items is always high with buy now pay later services. There are, however, tips you can keep in mind to avoid falling into this pitfall. You first need to read the terms and conditions of an afterpay app before deciding to use it. Regrettably, failing to read these terms has almost become second nature. The reality is that the important details about how an app works are always in the fine print. By reading it, you become aware of any hidden fees the platform levies on users.
Refunds and Indemnification Are Not Guaranteed
You should know that refunds are not guaranteed whenever you return select items bought with BNPL. This fact is often mentioned in the fine print. Also, there are no legal protections for the loss of goods purchased with BNPL. If you buy a Canyon bike on a buy now pay later arrangement and it is stolen before you have completed the payment, you cannot be indemnified
The Impact of Buy Now, Pay Later on Your Credit Score
Buy now, pay later obligations have no impact on your credit score if they are settled on time. However, their impact becomes significant following late payment penalties. In New Zealand, BNPL firms must report these defaults to credit bureaus. Your credit score ultimately suffers because of these filings. Research by the New Zealand government has confirmed that BNPL nonpayment has increased significantly in the last few years, with a quarter of users defaulting.
What To Do If You Can't Afford to Pay Back Your Buy Now, Pay Later Purchase
We live in a world of great economic uncertainty where a war in a far-off country such as Ukraine can significantly impact our daily lives. Job losses, medical emergencies, and incapacitation can destroy our finances in short order, harming our liquidity. You should engage your afterpay app customer rep when you find yourself in such a scenario. BNPLs often have zero-fee rescheduling arrangements. However, it is advisable to be aware that they have limitations.
Alternatives To Buy Now, Pay Later Services
There are a few alternatives to buy now, pay later services in New Zealand that can help you manage your finances better. These include:
In this model, the customer places a deposit on a product and then makes regular payments to own it eventually. It is largely similar to the lease-to-own agreement, a staple in real estate. You simply walk into a store that does rent-to-own deals, place a deposit on the item you intend to purchase and walk out proudly with your item. This arrangement has attractive incentives such as low deposits, fast approval, and zero credit checks. Unlike the buy now pay later template, customers, do not borrow money. Rather, they make regular payments on an item of interest for a specific period. When they complete the installments, they assume ownership. At the same time, they may opt to discontinue the installments and return the item to the store.
Another BPNL alternative is off-card financing. It lets you make mid-size purchases by spreading out the payments over nine months. It is ideal for fitness equipment, appliances, furniture, and electronics. Like in BNPL, the merchant subsidizes the purchase.
How To Use Buy Now, Pay Later Services Responsibly
The allure of buy now pays later apps is hard to ignore. You could describe it as the Instagram of retail due to its accessibility and addictive streak. You can, however, take measures to ensure that you use it responsibly.
You should always have an itinerary of products you plan to buy and the order in which to do it. One of the first shopping lessons we learned from our parents is that we need to draft a small list of items we intend to buy before walking into a supermarket. Sticking to the list prevents us from impulse buying. You can translate this hack to BNPL platforms. Always make sure you have an item on a list before adding it to the cart.
Like other consumer credit products, defaulting on payments can lead to extra fees that can eventually lead to a vicious debt cycle. Making prompt payments is the best way to take advantage of shop now pay later solutions. By doing so, you even qualify for loyalty rewards such as e-gift cards; buy now pay later.
Stick To What You Can Afford
The temptation to buy that $900 Schuberth C4 Pro Carbon motorcycle helmet can be hard to turn down after watching a clip of high-octane motocross action. You, however, need to be aware of the impact of such a purchase on your cash flow. Always buy what you can afford.
The Future of Buy Now, Pay Later
The shop now pays later model is likely to continue its impressive growth trajectory. Its convenience will most likely expand beyond B-2-C interactions to B-2-B transactions.
The latter occurs in greater volume and frequency and can incorporate the BNPL model into invoice settlements. Under this framework, the gap between merchants and suppliers would be bridged as payments would be made in full.
The model is also likely to yield other products. For example, to attract more clients, buy now, and pay later, no credit check entities will create loyalty programs, debit cards, and high-yield savings facilities.
The 5 Main Buy Now Pay Later Companies in New Zealand
Afterpay : Afterpay is the biggest buy now pay later provider in New Zealand. Afterpay is quite popular among millennials as it is a very convenient way to shop.
Zippay : Zippay is another big buy now pay later provider in New Zealand. It is quite popular among millennials as it is a very convenient way to shop.
Laybuy : Laybuy is a buy now pay later provider that is slowly gaining popularity in New Zealand. Laybuy is quite popular among millennials as it is a very convenient way to shop.
Oxipay : Oxipay is a buy now pay later provider that is slowly gaining popularity in New Zealand. Oxipay is quite popular among millennials as it is a very convenient way to shop.
Latitude Pay : Latitude Pay is a buy now pay later provider that is slowly gaining popularity in New Zealand. Latitude Pay is quite popular among millennials as it is a very convenient way to shop.