Buy now… but you’ll pay later
Eyeing off those designer shoes? A nice Christmas gift for your partner? Or maybe a holiday stretching the budget? Staggering payments may seem like an appealing option, but as Financial Coach Rebecca Pritchard explains, the devil is in the detail.
Afterpay. It’s everywhere.
And it’s great, right? So convenient. A bit like layby. You’re not even paying interest.
Like a shiny new toy we can play with guilt-free, Afterpay has become our new favourite treat for when we need a treat that we just can’t afford… this week.
Because at least it’s not a credit card, right? Because if you use it responsibly it’s ok. Because if you have the money to make the payments it’s fine.
Research shows that even when not paying interest, people spend 30 per cent more when using credit as opposed to what they spend when stumping up cold, hard cash.
In the latest instalment in our series on financial literacy, we spoke to Wealth Enhancers’ Financial Coach Rebecca Pritchard about why Afterpay isn’t all it’s cracked up to be.
We have read Afterpay being described as ‘the devil lurking in your online shopping cart’. Why isn’t everyone a fan?
Have you heard the verse “and lead us not into temptation, but deliver us from evil”? Afterpay, and it’s contemporaries, are preying on the vulnerabilities of each of us: ‘have this now, pay for it later! Make it future Rebecca’s problem!’.
Afterpay, and it’s contemporaries, are preying on the vulnerabilities of each of us.
I deeply believe most of us (myself included) struggle with this battle, and this is why so many people have significant credit card debt. Afterpay, however, is a newer, friendlier and better branded version. Therefore, it has crept into the lives of the otherwise financially disciplined or those who don’t have the discipline to say no.
We may have some readers who have either never heard of it or never used it. How does Afterpay work?
It works like a mini-credit card or loan. Buy a product (or service), then pay for it in four fortnightly instalments. Much more digestible than footing the bill now, right?However, instead of rationalising, and hopefully assessing, the underlying price of this product, we start rationalising the instalment cost instead.
I’ve almost fallen prey to this. Last year, I was looking at fabulous headwear for Spring Racing. I thought I would spend about $50. I found myself looking at some beautiful pieces that were $200, which was $50 per fortnight. I agonised over this decision and ended up closing down my whole computer and never returned to the site as I didn’t trust myself to resist again.If you pay on time and in full, there’s no extra cost, which is why it’s so tempting. However significant fees and penalty charges will apply if you are late or miss payments, which is where they make the money.
The consumer element of the business model is predicated on you f**king this up eventually (much like those who spend years avoiding interest charges on credit cards, only to get stung in the future).
I remember one of my economics teachers saying: ‘there is no such thing as a free lunch’? Is this kind of the same thing?
Yep! This as a massive slippery slope to funding a lifestyle you can’t really afford. If you can’t afford to pay in full now, you probably can’t afford it. Who knows what else will pop up in the coming fortnights? You’re spending money you haven’t got yet. Back to my Spring Racing story – I remembered the next three fortnights would coincide with Christmas shopping, which is why I had to drag myself away.
If you can’t afford to pay in full now, you probably can’t afford it.
And Afterpay is not really like a lay-by, is it?
It’s the opposite of lay-by. Those were the good old days! Lay-by is essentially pre-paying for goods, and once paid off, receiving them.
Between using our phone like a wallet and credit cards and contactless payment, money doesn’t seem real anymore. Do you think that’s fair? What are the consequences?
Absolutely a fair comment. My members often reflect on this. At Wealth Enhancers we frequently refer to a personal spending detox, which is reverting to cash for a week or two and actually reflecting on, and feeling our way through, each expense. If we’re not keeping track of our money, then it’s very easy to run out. And when we’ve run out of the money we told ourselves we were allowed to spend, it’s easy to justify taking money from other areas (or putting it on credit) because we “need” to.
Can Afterpay affect your credit score?
Yes, but perhaps not how you would think. Making Afterpay payments doesn’t contribute any goodwill towards your credit score, so if that’s your rationale, forget about it. However, if you are not meeting your repayments, Afterpay and similar businesses can perform a credit check and report negative activity, which may come up as a black mark next time you’re looking to apply for something.
What’s the worst story you’ve heard about Afterpay?
The worst stories are not financial disasters, but serious impacts on lifestyle. Where Afterpay or similar has been used, the individual is spending their future money to fund today’s lifestyle. This is fabulous for today. But then next fortnight’s money needs to go towards a purchase that’s already been consumed, which isn’t as much fun. By the third or fourth payment, the joy from that purchase is probably long gone, and you’re resentful for not having any money today. So you Afterpay again. This is a really vicious cycle I’ve seen that leads to genuine unhappiness and anti-social behaviour, as ultimately, to get ahead of this cycle, serious lifestyle impacts need to be absorbed.
Afterpay and their contemporaries have improved their algorithm and checking measures, which means there are only so many purchases they will allow you to make. However, unfortunately, I’ve seen Afterpay payments linked to credit cards, which further exacerbates this. It makes me really sad when I see the flow-on impacts from this.
Are there fees and charges attached to Afterpay? What are they like?
It varies from provider to provider, but you’re looking at a late fee that might be a set amount or a percentage of your order value. Afterpay recently capped their late fees at a maximum of $68 per order.
If you are going to use Afterpay, what guidelines should you follow?
I can’t advocate using it, I’m that evangelical about it. However, for those who are already working through the payments, get on the front foot and make sure you have got the cash ready to make those payments. Put it somewhere safe, even in another bank account, so you are guaranteed to make the payments, and definitely don’t have it linked to a credit card. Ensure you have got reminders set to double check you’ve made the payments. Once it’s cleared, high five yourself and perhaps keep up those repayments into that bank account for future items you want to buy – so you don’t need Afterpay.
Are there any benefits to using Afterpay? I know people who say Afterpay helps them budget and control their finances. If people are responsible enough to use Afterpay well, is that ok?
I often refer to those people who have a credit card but have never paid interest as the people in the most danger. It’s a smug feeling that I held for a number of years before I became a Wealth Enhancers member. Interest is a tangible message and ongoing reminder that we’ve spent more than we could afford. Not having interest, and not paying fees on Afterpay, can confuse us into thinking we’re gaming the system. We’re not, that’s why these business (Afterpay, ZipMoney, all the credit divisions of the banks) make good money (have you seen Afterpay’s share price lately?). Studies have shown that when we use credit, we spend 30 per cent more. Thirty per cent! Advertised on Afterpays website for merchants is: “Afterpay customers spend more per transaction and over their lifetime, and they come back more often”. That kind of cash leakage, compounded over time, will ultimately mean you’re significantly behind for other goals you’d like to achieve. And at some future point, you will see that is not ok.