Buy now, pay later (or BNPL) loans are easy ways to get cash quickly. They have very few regulatory requirements around them, which often trips people up when taking out loans.
But can't I get a loan out to pay the first loan?
Sometimes this is the case. But the more loans you add up, the more you're going to have to pay, eventually. It's legally yours to pay — although you can't be jailed for non-payment, you can be taken to court by debt collection agencies.
But what if I see something I want to buy?
Buy now, pay later loans can be helpful if you see something that you need or want. But the expectation is that the money lent to you is paid back on your day of pay. So, if you know you can't meet that repayment (plus the added interest), it is best to avoid taking out the loan.
How do I know if BNPL is right for me?
A lot of BNPL loans are just a click or two away, meaning you can secure them before you've even had a chance to review the terms. The critical thing to note is that you should read all the terms and conditions before agreeing to anything — otherwise, you risk legally signing up for something of which you're not sure.
Aren't BNPL loans interest-free?
Most BNPL loans are interest-free because many BNPL providers rely on people not making payments in time — and then charging them late fees. This is why they have a high turnaround period — because they can make money off you not being able to repay your loan in time.
Usually, they're advertised in four easy instalments — you might see them advertised on shop windows, mainly if it's Afterpay in New Zealand. Stores may want to advertise pay later loans to ensure a sale, while the responsibility of chasing the repayment belongs with the BNPL lender. They may perform this task themselves or hire a debt collection agency to do so on their behalf.
Interest is also added when missed payments occur, and some providers will ask for a settlement fee or one lump sum payment because the original agreement was 'broken'.
How long can I take a loan out?
That depends. It's pretty standard for BNPL loans to continue for as little as 30 days, although they can last up to 12 months, with vastly inflated interest rates.
Will BNPL affect my credit score?
No — not unless you start missing payments.
However, lenders may consider your BNPL applications when they make a full credit enquiry to approve you for bigger loans, such as a mortgage. If you're constantly taking out BNPL loans, lenders may get nervous when considering you for loans.
Can I be rejected from BNPL?
Yes, if lenders see you have a bad credit score. So, while it's unlikely a full credit enquiry will be performed, they may still check to see if you're able to repay the amount in full over time.
How do I use BNPL safely?
To get the best use out of BNPL and avoid all the risks, you have to ensure you have the right amount in your account by the next due payment date.
So, if you borrow a loan for $400, in four instalments, over 30 days, that's around $60 a week you have to set aside. You need to make sure you have that exact amount and can pay on time — it might even pay to send the money through the night before if you're with a different bank than your BNPL provider.
What else can I use that's not BNPL?
There are other options out there for repayment. The most common one is a credit card, which could be suitable for growing your credit score out, provided you make repayments promptly. Some cards even offer 0% interest for a fixed period to entice new users.
You could look at building your score until you can get a regular loan or simply saving up enough for the item itself to avoid the whole loan situation. Ultimately, the decision is up to you.
But if you're genuinely dealing with shopping or other types of addictive behaviour impacting your mental health, there are services to help you deal with that. Healthline offers support and over the phone services for those struggling with ongoing mental health issues. The New Zealand government also has services for helping with mental or financial stress issues.
BNPL loans are relatively high risk, considering the short time between getting the money and repayment. To use them healthily, you need to be sure of having the available funds for refund in your account come to the next pay date. Otherwise, they become more costly than the promised 0% interest.