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For millions of Australians, Buy Now, Pay Later providers like Afterpay or Zip have become a common tool to take the pain out of purchases by breaking the cost of goods or services into smaller chunks paid over several weeks.
While their products are new, their model is a different take on a more traditional lay-by agreement, where a customer would pay off a larger purchase in two or more payments, receiving the object after paying the whole of the sum.
Products like Afterpay flip the scheme on its head, giving customers the goods or service up front and letting them delay the costs.
But, until now, these credit products have managed to evade government regulation for over a decade.
“Today is a positive day for Australian consumers with the law now treating Buy Now, Pay Later as what it really is: it's credit. The reason why it's taken so long is by now pay later providers had taken advantage of a loophole in the law that ensured that they didn't get covered by the credit laws that apply to all other credit, including credit cards and mortgages and the like."
That's Drew MacRae, Senior policy and advocacy officer at the Financial Rights Legal Centre.
As of Tuesday, the 10th June, strict new regulations from the Albanese government have come into play with Buy Now, Pay Later providers now treated similarly to a credit card.
The new laws require providers to hold an Australian credit licence, comply with existing credit laws, and have also established a new category of low-cost credit under the Credit Act.
So, if you're curious about these products or if you're one of the estimated 41 per cent of Australians who've used them already in the last six months, according to a Finder survey - you may be wondering how these regulations will affect you.
"They have responsible lending obligations so the laws are being introduced to ensure that they take the steps they need to be assured that you can afford the credit that they're providing."
Michael Saadat, International Head of Public Policy at Afterpay, says this means for new users there will now be additional checks and balances before they can pay for products with their service.
“Anyone who's applying for an Afterpay account will be asked to agree to a credit check and will be asked to provide some additional information as part of the application process. So that's already live and it's working well. And that credit check will assist Afterpay in determining what spending limits should be allocated to the customer.”
Dr Domenique Meyrick, co-CEO of Financial Counselling Australia, says there will also be new protections for those struggling with making their payments.
"The other big change is that it means that consumers have a right to ask for hardship if they're having difficulty making payments and they can complain to the Financial Ombudsman, AFCA or the Australian Financial Complaints Authority. And then the final thing it means is that credit checks will be done. And so, when you use Buy Now, Pay Later, it might show up on your credit report."
This last change means that your Buy Now, Pay Later debts could impact your credit score.
While using the service responsibly can offer an opportunity to build a positive credit score, missed or late payments may affect a customer's future borrowing capacity for a house or a car.
Mr MacRae from the Financial Rights Legal Centre says customers should make sure they're not accepting a higher spending limit than they require as some providers may display the full amount on the user's credit report.
"Understand that these products will now be listed on your credit report. So, it means that if you're being offered say $4,000 for a Buy Now Pay Later facility for something that you wanted to buy use to buy $150 pair of jeans, the full amount will be on your credit report, that $4,000. So it's important to engage upfront whether you need that higher limit. If you don't need it, don't take it and make sure your Buy Now Pay Later limit is right for you and your needs."
Consumer advocates like Dr Meyrick say the new checks and balances provided by these regulations have been a long time coming.
"Almost as soon as by now pay later products emerged onto the scene, financial counsellors started seeing people getting into trouble with them. We've been calling for a really long time for some protections in place."
Critics have long argued that products like Afterpay could encourage consumers to be flippant with using money they don't have and could lead vulnerable people into lasting debt.
However, Afterpay's Michael Saadat says their customers are overwhelmingly responsible with their debts and he argues there are significant guard-rails in place to avoid harm.
"I guess the biggest difference is that a product like Afterpay is completely interest free. So unlike traditional credit products like credit cards, there's no risk that a consumer will end up in a spiral of revolving debt that's incurring interest rates of 20 per cent or more. Every transaction is four instalments. It's really straightforward. You're never charged interest and if you miss a repayment, you can't actually use Afterpay to spend again until you pay back the amount that's overdue."
The element not mentioned here are Afterpay's late fees, which have historically represented upwards of 20 per cent of their annual revenue.
If you miss an Afterpay payment you will be subject to a fee of up to 25 per cent of the cost of the order.
While this sum may not be much, Dr Domenique Meyrick of Financial Counselling Australia says costs can compound when vulnerable people are using several Buy Now, Pay Later providers at once.
"You see people who are using buy now pay later products for everyday items. They'll have multiple buy now, pay later products on the go at once. It's very hard to track. There's late fees accumulating."
Vicki Penner, Queensland manager of the Salvation Army's Moneycare team, says - prior to this regulation - she would see clients use Buy Now, Pay Later products lost in a debt spiral.
"Recently, one of our clients came in working hard, finding it hard to make ends meet. That's when he started to use Buy Now, Pay Later to fill the gap. He thought it was like a one-off time, but the next pay cycle, the same thing happened. So he continued to use the Buy Now, Pay Later, and eventually what happened was he maxed out his accounts and opened up another to cover the first repayment. This cycle actually continued until he had six Buy Now, Pay Later accounts. That's when it became unmanageable."
She believes the new regulation will do much to protect those at risk of accruing severe debt.
"Buy Now, Pay Later debt doesn't always come from poor choices, but it actually creeps up quietly and these reforms are here to catch those risks a lot earlier."
While consumer advocates have welcomed the transparency and accountability that regulation has brought the Buy Now, Pay Later sector, many argue there's room for further reform.
Drew MacRae from the Financial Rights Legal Center says these changes don't address the issue of customers using several products concurrently and potentially generating significant debt through these providers.
"It's actually one of the flaws of the regulation as we see it at the moment. There is no real strict rules against multiple accounts being obtained. We would love to have seen that. That's one of the things we were arguing for. There are some rules about them having multiple accounts within the same family of Buy Now Pay Later providers. But yes, we're hoping that maybe the credit reporting system may lead to some improvements in that multiple account problem that we've seen."
