The dangers of buy now pay later schemes like Afterpay and Zippay

Thousands of Australians are signing up to buy now, pay later schemes every week but what are they dangers if you cannot pay for the goods in time?

Nearly 95,000 new buy now pay later accounts are being opened every month in Australia as shoppers lap up the ability to get goods now and pay them off later.

Afterpay started four years ago and Zip Pay three years ago and already they have collectively amassed a massive 2.6 million customers in Australia and New Zealand.

But despite coming under heavy scrutiny at a recent Senate inquiry into the purported harm these payment methods are causing to users, they continue to boom.

The Australian Securities and Investments Commission found one in six buy now pay later customers had become overdrawn, delayed their payments or borrowed money to meet their repayments.

MORE: Crackdown on buy now, pay later schemes

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The industry has also come under intense criticism from financial counsellors, who have seen some customers using the schemes end up in financial distress.

But the Afterpay juggernaut said 85 per cent of customers link their payments to their debit not credit cards and their default rate on payment is only 1.1 per cent.

Administrative assistant Hannah Cossins, 30, said she’s used Afterpay twice to buy clothes and shoes, and it helped her spread the burden of shelling out hundreds of dollars at once.

“I found it really easy to use but it could be easy to overspend,” she said.

“I used it before Christmas and spent about $400 and it was easy to pay for because the payments were spaced out.”

Hannah Cossins, 30, has used AfterPay to pay for goods including clothes and shoes.

Economic adviser to Afterpay Craig Emerson said the schemes were growing at the expense of credit cards which slug customers with hefty interest charges if they don’t pay off their balance in full each month.

“Young people are giving up credit cards or not taking up credit cards and prefer buy now pay later,” he said.

“Instead of getting on a revolving door of debt it’s impossible to do that because the maximum amount you can accumulate (on Afterpay) is $2000.”

But Financial Counselling Australia’s chief executive officer Fiona Guthrie said counsellors were seeing a “growing number” of cash-strapped users signing up to the schemes and getting themselves onto a debt treadmill.

“More and more clients have got Afterpay debt, if it looks like credit and smells like credit it should be regulated like credit,” she said.

“This can be just as dangerous as a credit card, it can mess up your credit rating when trying to get a home loan.”

The issue with buy now pay later schemes is they not fall under the credit code and therefore do not have the same strict credit checks before customers can sign up.

But Zip Co’s co-founder Peter Gray said the schemes allowed customers to use it as a “budgeting tool” and it was “an effective way of smoothing life’s everyday expenses.”

“For us our customers are very savvy,” he said.

“I think it’s putting the heat on the credit card market, consumers are embracing these in their millions.”

@sophieelsworth

Afterpay

• 2.6 million customers.

• No credit checks.

• Average purchase amount is $150.

• Payments made in four equal automated fortnightly instalments.

• Late fees start at $10 and are capped at 25 per cent of the purchase price or $68, whichever is less.

Zippay

• 900,000 customers.

• Credit checks.

• For purchases under $1000.

• $40 minimum monthly repayments and $6 monthly fee is balance still exists at the end of the month.

• If the minimum repayment is not made 21 days after the due date a $5 late will apply.