The perils of Buy Now Pay Later

FinCap is concerned about the rise in popularity of Buy Now Pay Later (BNPL) schemes, such as Afterpay, Humm, Laybuy, and Zip, and how these are triggering or compounding financial hardship for many people.

We are lucky to have free financial mentoring services in our district that help people manage their money. FinCap is the umbrella organisation that supports these service providers across New Zealand.

BNPL has proliferated in the last few years. Over 587,000 New Zealanders have an active BNPL account. BNPL is especially popular amongst younger people: 50 per cent of credit-active consumers who use BNPL are aged under 30 years.

BNPL allows people to buy goods and receive them immediately, with instalment payments made over weeks or months without accruing any interest on the amount owed. It differs to layby in that purchasers don’t receive the goods until the total amount is paid off.

It is a legal contract and purchasers cannot cancel the sale once the first payment has been made. Payments are fixed and cannot be altered (unlike layby). If a purchaser misses a payment, penalties are applied.

But BNPL products fall outside the strict definition in the Credit Contracts and Consumer Finance Act (CCCFA) because they don’t charge interest or fees, or take a security interest over goods.

BNPL providers therefore aren’t regulated under the CCCFA as other lending institutions are, which means there is no obligation on them to check if consumers can afford the repayments, nor to offer assistance should consumers find they can no longer make the repayments.

Weekly or fortnightly payments for several purchases can very quickly mount up to several hundred dollars – money that is needed for food and rent. Penalty fees are applied for each missed payment, and these can mount up: late payment fees, debt collection fees, transaction fees, and bank dishonour fees. Worryingly, some consumers are using credit cards to cover their BNPL repayments.

Of concern is that consumers are using BNPL to buy everyday essentials, not just ‘nice to have’ items, and there are recent signs that BNPL providers may be expanding into new areas, including the payment of fines and alcohol sales. These moves have been widely criticised by community groups.

BNPL makes it too easy for people to make impulse buys, and people can very quickly fall into a spiral of debt. Consumers who default on their repayments can quickly find themselves with a bad credit rating, and this can affect their ability in the future to access other forms of loan, such as a mortgage or car loan or a credit card.

It concerns me greatly that our current legislation is letting down our most vulnerable people. National will amend the CCCFA so that it covers BNPL type credit contracts and high-cost lender arrangements, the types of which are currently excluded under the new provisions.

In the current cost of living crisis, the last thing we need is more and more people using BNPL to buy their day-to-day goods and falling into a debt trap from which they struggle to escape.