Afterpay continues to rise in popularity across Australia, particularly among young people and low-income earners. It may seem appealing to ‘buy now, pay later’, but could Afterpay and similar schemes be doing more harm than good? 

The risks associated with Afterpay are high and many people end up in a lot of trouble if they overspend, miss a payment, lose track of purchases, or can’t afford to make their repayments.  

Read below to find out how Afterpay works, its benefits, risks and how you can use it safely (if you decide to use it).

What is Afterpay?

Afterpay is a ‘buy now, pay later’ platform, allowing consumers to buy now, receive their goods/services and then pay the purchase off in instalments. 

AfterPay is probably the most well-known, but alternatives like Zip, Affirm, PayPal Credit and Sezzle all fall into the same category, with the same potential risks involved.

How does it work?

If you make a purchase through Afterpay, you will need to make equal payments in four instalments over an eight-week period to pay back the purchase. 

Using Afterpay is like using a credit card as you can make a purchase without having the available funds and then pay that purchase off. You should treat it like a credit card and be careful with overspending.  

If you cannot meet your fortnightly payments, you will incur Afterpay fees. You will be charged a $10 fee for missing a payment, and then an extra $7 fee will be charged if you don’t pay that instalment within a week. For orders under $40, only a $10 fee will apply. For purchases between $40 and $272, fees will go up to 25% of the purchase price.  

Afterpay have introduced a cap on late fees, so for orders over $272, you won’t pay more than $68. However, it’s a slippery slope if you’re doing a lot of shopping and the fees start to stack up. 

As consumers can ‘buy now, pay later’, their purchases can easily add up and they may not be able to pay off their repayments. In turn, they will incur more debt as the temptation to overspend is high. For an real life example of how this can happen, click here!

What are the benefits of using Afterpay?

• You can take advantage of sales or discounts on products and services that you’ve been eyeing off for a while.
• You can make essential purchases in between pay checks where you would normally not have the spare cash to afford it.
• It is easy to use (some would say a bit too easy!).
• There is no fee to use the Afterpay platform (unlike credit card fees).
• You can receive a product before you pay for it.
• Afterpay doesn’t conduct credit checks (which again, makes it a little too easy to use).

What are the risks of using Afterpay?

There is a growing concern that Afterpay is normalising debt. It can become a vicious cycle of making purchases, receiving them, putting off paying your repayments and incurring late fees because you’ve failed to make them in time.

Some of the biggest risks associated with Afterpay are:

• If you don’t make your repayments, you will incur exorbitant late fees.
• Afterpay is a form of credit, but many people don’t recognise the platform’s similarity to a credit card.
• Small payments can add up quickly, despite Afterpay’s spending limits.
• You can incur high debt if you can’t afford to make your repayments.
• You can easily end up spending more than your means.
• Using platforms like Afterpay can affect your future credit history if you incur debt.

How to use Afterpay safely?

Although we don’t encourage using Afterpay or similar platforms, there are some ways you can avoid the negative consequences that come with it (if you do decide to use it).

• Create a budget – it is important to figure out how many purchases you can afford and pay off within the set time frame to avoid late fees and debt.
• Link a debit card to your account (not a credit card) – this ensures you have the funds to pay it off and won’t affect your credit history if you end up in financial debt.
• Set spending limits so you don’t go over what you can afford.
• Set up repayment reminders in your calendar or phone so you never miss paying one.

Our advice

You’re always better off using a debit or credit card over platforms like Afterpay.

Our best advice is to not consistently spend outside of your means and rely on Afterpay. The rise of social media has brought with it an unrealistic representation of what the average consumer’s life should look like. People are bombarded with images of unattainable and unsustainable lifestyles and spending habits, and made to believe that this is “normal” and what they should be doing as well.

If you’re constantly spending money online without having the funds to afford it, you may need to create a budget or revise an old one. You should review what sustainable spending habits should look like in your own circumstances.

To learn about budgeting and how to create a budget, read our blog here!

If you’re fresh out of high school and looking for advice on debt and credit cards, click here!