Settlement Guide

'A debt spiral': The risks of buy now, pay later services

In 2018-19, buy now, pay later providers earned $43 million in revenue from late payment charges. Source: Getty Images

Buy now, pay later services may have made buying products easier for consumers, but with their increasing popularity and almost ubiquitous presence, concerns are growing that some users may get caught in a debt spiral.

By the end of 2018-19, there were over 6.1 million active 'Buy now, pay later' accounts in Australia, buying goods worth $5.6 billion in that year alone. However, there are concerns that people using multiple buy-now-pay-later services simultaneously may lose control of their debt management and fall into financial hardship.


Key points:

  • Buy now pay later services are unregulated in Australia, which gives the consumer fewer rights if something goes wrong.
  • According to an ASIC report, 21 per cent of buy now pay later consumers missed repayments in the preceding 12 months and incurred late fees.
  • Over half of all buy now pay later users made multiple purchases using the service.

What is 'Buy now, pay later'?

When you purchase something with the buy now, pay later option, you can pay for your purchase through interest-free instalments. These services are becoming increasingly popular while demand for other consumer finance products has plateaued. 

There are multiple providers in Australia that offer buy now, pay later schemes on purchases worth up to $30,000, with options to repay in periods ranging from a few weeks to up to five years. 

Buy now pay later
One in five of those who missed repayments on their buy now, pay later purchases were cutting back on or missing essentials like meals and paying rent.
Getty Images

While repaying a loan through interest-free instalments is an attractive option for shoppers, there are often high fees if someone misses a repayment. 

According to a report by the Australian Securities and Investment Commission, 21 per cent of shoppers who used the service in 2018-19 missed a repayment and were charged late fees that totalled over $43 million in that year. 

It is an unregulated industry, so this means that there are very limited consumer protections when using these products. Other credit products come under the credit code and responsible lending legislation, and buy now pay later is yet to be regulated.

-Financial counsellor Deb Shroot.

'A debt spiral'

The way buy now, pay later service operates, it's easy for buyers to make multiple purchases simultaneously and overcommit themselves without considering the overall financial impact on themselves. 

Multiple products and services can make it difficult to keep track of your repayments, resulting in missed repayments and late payment charges.

The other important thing to consider is your suitability to borrow for a house or a car.  

"Just like any debt, if you don't pay, it is likely to affect your credit score and that's because if you don't pay it and the company decides to record that with a credit reporting bureau as a default, then that will affect your credit score," says Fiona Guthrie, the CEO of Financial Counselling Australia.

While not all buy now, pay later providers use the credit reporting system, people can be refused a home loan or a car loan if their capacity to repay is limited due to existing multiple buy now pay later or other loans. 

“If you have a lot of debt that you need to pay back, you may have a good credit rating. However, you may not have the capacity to repay the loan, so you can still be rejected on that basis," says Deb Shroot.

Buy now pay later
Financial counsellors say they often see cases where people already struggling with their buy now, pay later debt taking out additional loans to buy essentials.
Getty Images

The ASIC report found that of those who missed repaying their debt, one in five were cutting back on or went without essentials, including meals and paying rent. 

"People we speak to haven't been able to afford rent because they've had too many buy now pay later payments come out of their account, and they haven't been able to afford to buy food," says Kirsty Robson, a financial counsellor with the National Debt Helpline.

They've been buying their groceries with buy now pay later and then getting stuck in that kind of trap where they use the product for their living essentials and then pay it down and then have to use it for their living essentials again.

Experts suggest signing up for just one or two buy now pay later purchases at one time and repaying the amounts owed in time without incurring late fees. 

If you are struggling to manage your debt, call the National Debt Helpline at 1800 007 007. 

You can find more information on the government's Money Smart website.

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