Can buy now pay later affect your loan application?
The contents provided on this page are for informational purposes only and do not constitute financial advice. Consider your personal circumstances and objectives before making any financial decisions.
Buy now pay later (BNPL) services have become a popular way to manage purchases. In fact, 43% of Australians surveyed in July 2024 said they used BNPL services in the 6 months prior.
Let’s take a look at how buy now pay later could affect your loan application, and some alternative solutions you could consider to support your financial health in the long-run.
What is buy now pay later (BNPL)?
Buy now pay later, also known as BNPL, refers to services that allow you to make purchases and delay payment, usually spreading out the total cost in a number of smaller instalments over a few weeks. There is typically no interest involved, although fees and charges can apply if you miss a payment.
BNPL services are generally provided through retailer partnerships, and cost retailers an additional fee for each purchase made through a BNPL service. In June 2021 the Reserve Bank of Australia found that this was costing retailers, on average, a little over 4% on all sales made via BNPL platforms.
BNPL might make it easier to manage and make purchases in the short term, however frequent use can have long-term implications, particularly when applying for loans like personal loans or mortgages.
Services like Afterpay, Zip and Klarna are some popular examples of BNPL providers in Australia.
How BNPL might affect your loan application
When you apply for a loan, most lenders in Australia are typically required to adhere to responsible lending obligations to ensure the loan is suitable for you.
This usually includes considering your financial commitments in addition to your income. That is, analysing how much of your income is already committed to repayments.
BNPL repayments, like other financial obligations, are often factored into this assessment.
If a significant portion of your income is allocated to servicing debt, it could impact your borrowing capacity. In the case of BNPL repayments, even if they are small, they could contribute to this if they add up to a higher total monthly obligation.
In July 2024, Australians who used a BNPL service had an average BNPL debt of approximately $867.
BNPL can feel like a flexible way to make purchases, but there are a few important considerations to keep in mind:
1. BNPL repayments can add up
A few small repayments may not seem significant individually, but when combined, they could increase your total financial commitments. This might make it harder to meet lending criteria in some circumstances.
2. BNPL still considered a form of debt
While BNPL often feels different from traditional loans or credit cards, it is generally treated as a financial commitment by lenders when assessing your borrowing capacity.
3. BNPL may contribute to overspending
Making purchases using BNPL services may make it harder to see how much you are spending overall. Over time, this might lead to unintended financial strain.
4. Watch out for BNPL fees
With BNPL services, missed or late payments can result in additional fees. These can add up over time if not managed and increase the overall amount of both your debt and purchases. In July 2023 Finder research revealed the number of Australians paying BNPL fees had increased significantly since 2020, from 5% to 7%, with an average of $77 paid in BNPL fees.
BNPL alternatives to make your purchases
If you’re looking for safer and more affordable ways to make your purchases, and want to protect your ability to borrow, here are some alternatives to BNPL that might help you stay on top of your finances.
1. Consider using cash or debit cards
If you can afford to pay for purchases outright, using cash or a debit card might help reduce your ongoing financial obligations. This could help keep your borrowing power intact.
2. Consider short-term loan options
If you have a temporary cash-flow need and just need a quick cash boost, you could consider short-term lending solutions like Beforepay’s Pay Advance. These options generally offer greater transparency and structure, helping you stay on top of your expenses.
3. Create a budget that works for you
Planning your expenses carefully could help you avoid over-reliance on BNPL. There are various budgeting tools and apps available that might assist in tracking your spending and income.
4. Explore structured lending options for larger expenses
For bigger purchases, a personal loan might provide a more transparent and structured repayment plan compared to BNPL. Personal loans typically offer fixed repayment schedules, which could help you plan more effectively.
5. Pay off BNPL balances sooner where possible
If you already have BNPL commitments, paying them off early might help free up your financial flexibility. This could make managing your finances simpler and improve your overall financial health.
BNPL can be a helpful tool in some situations, but it’s important to understand its potential impact on your financial situation. By making thoughtful decisions about your spending and payment methods, you could protect your borrowing capacity and set yourself up for future financial success.
Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.
