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Afterpay is becoming extremely popular. Since its launch in Australia in 2014, it has become one of the preferred ways for younger people to shop.
Afterpay is primarily funded by retailers and service providers. For consumers, it’s free.
If you haven’t used it yet, basically, it is an agreement you make with the store or service, to take home what you want today, and pay for it later.
Afterpay is the service in the middle, that lends you the funds on a temporary basis.
Then, you pay for your purchase in three instalments. If you miss a payment, you can’t use Afterpay to purchase anything else until you’ve settled your account in full. Missing an instalment results in a $10 fee and, if you fail to make the repayment within a week, another $7 fee will be charged. So, if you spent $100 on a pair of jeans, and missed two of repayments, they could end up costing you $120, or more.
Unlike a lot of ‘buy now, pay later’ schemes, Afterpay doesn’t charge interest and late payment fees are capped – starting at $10, but don’t exceed more than 25% of the purchase price or $68, whichever is less.
Also, initially, Afterpay is most likely to limit you to small purchases until you can prove yourself as a ‘worthy creditor. Limits may then slowly increase once you’ve established a credible track record – to a maximum of $1500. To make a purchase with Afterpay, you need to demonstrate that you have at least 25% of the total purchase price in your account for the transaction to be approved.
Afterpay says that these checks and balances are in place to ensure ‘responsible lending’ practices.
So, in theory, Afterpay sounds like a pretty good idea. And it is.
But, there are some things to be mindful of. While Afterpay will certainly fuel any desire for ‘instant gratification’ it does normalise debt in a way that’s not necessarily healthy.
Last year figures were released which showed Afterpay has been used by more than 1.5 million customers to spend about a billion dollars from 14,000 merchants.
We all love the convenience of electronic transactions – it’s great to swipe the card, enter the number online, or tap your smartphone at the checkout. Afterpay is no exception.
Technology has made spending very easy, and as money coaches, that’s where we see some red flags.
Because unless you’re really savvy – that means you budget carefully and check your bank statements regularly – it’s easy to lose touch with how much you’re spending. New shoes here, a new laptop there, dinner, a beauty treatment, the movies …. It might seem affordable, but …is it necessary?
Without wanting to sound like we’re nagging. There’s some stuff that you might not actually buy if it weren’t so easy to just walk out of the store with it. And deal with the money later.
The Afterpay service appeals to a young demographic.
Figures show that the 18 to 34 age group makes up almost 70% of Afterpay’s customer base.
And here’s the problem. Figures also show that very few people in this group of Australians actually have adequate personal insurance cover, or a rainy day fund, or any kind of financial buffer if suddenly something goes wrong – illness, job loss, a baby on the way.
So, the best advice is to tread with caution. You really are better off paying for what you want with cash, or a debit card, so you can keep track of your spending easily and also avoid any kind of late fees or penalties.
This keeps the transaction simple too, if for any reason you find yourself in a dispute – you can deal directly with the retailer, receipt in hand, without complicating things with a third party financier in the middle.
Knowing what you spend, is the key to getting ahead financially, and while Afterpay might mean you can get your hair done in time for your hot date, or get a new set of tyres for the weekend away, it should be used with a degree of caution.
This is general advice and should not be treated as personal advice. Julie Nipperess is an authorised representative of Step Up Financial Group Pty Ltd ASFL No: 512509.