How Do Buy Now, Pay Later Apps Work?

Here's what you need to know.

Young people around Australia are waving goodbye to credit cards and saying hello to Buy Now, Pay Later (BNPL) apps.

This neglect of credit cards is due to a growing fear of debt, interest rates and extra fees. According to a survey released by Australian BNPL app Afterpay, only 41 per cent of young people own a credit card.

To put that into perspective, in 2002, 58 per cent of young people had a credit card. So, that’s a big drop.

While we may be ditching the plastic, we have picked up the phone to find an easier alternative.

Enter: Buy Now, Pay Later (BNPL).

Offered at a majority of in-store and online retailers, you may have already seen BNPL options around like Afterpay, Zip Pay and Splitit, just to name a few.

the concept of afterpay with online shopping is a blessing and a curse but imma look cute regardless

— lil lo (@lorianland) March 8, 2021

Chances are, you’re probably already using a few of these on your phone, but do you know how they work? As it turns out, only one in five people using BNPL apps understand exactly how they work.

So, we’re going to break BNPL down for you, list some pros and cons, and leave the final choice up to you whether you want to use BNPL apps or not.

Okay, so how does it work?

BNPL operates very simply. It allows purchases to be made online, and gives you the choice to pay them off over time in weekly, fortnightly, or monthly repayments.

Some of these apps charge interest, but only after an interest free period. If you pay off the balance before the period ends, you aren’t going to pay anything in interest.

Let’s create an example: you’re out shopping, and you have seen a sweet pair of shoes for $100. You want them, but you only have $50 in your bank account and payday is next week.

Instead of waiting until payday, the store offers a BNPL option that lets you pay for the shoes in four interest-free payments, each at $25. You pay $25 today, receive the shoes, and then pay another $25 every two weeks for six weeks.

Pretty easy, hey?

Right. So, is there a downside?

Yes. You’re not just going to get away with money for free, although how good would that be? The first downside to BNPLs are late fees and interest charges.

If you forget to make a payment or don’t have enough money in your linked bank account, you will most likely be charged a late fee, some reaching as high as $15.

Miss multiple payments and they’ll start to stack up. Not good.

The other downside is the high interest rates of BNPL apps. Once that interest-free period is over, any money you haven’t paid back will gain interest—fast.

Will it impact my credit score?

Now, let’s talk credit score. A credit score is a number that helps banks and lenders know how reliable you are as a borrower. If you have a high score, you are seen as less of a risk to lend money to.

So those BNPL payments that you missed will have a negative impact on your credit score. This isn't ideal when you’re wanting to get a home or car loan in the future.

It’s not all bad though, right?

Of course not! The BNPL payment method is quick and easy to use, and offered at most retailers for your convenience. Basically, it’s perfect for our generation where everything is done online and instantly.

They also aren’t interested in burying you in debt. Most BNPL apps will send notifications about spending caps and repayment warnings.

What’s more, if you’re late on a payment, the company will stop you from spending more money that you don’t have until you resolve your outstanding repayment.

Remember how we talked about credit scores above? BNPL can have a positive impact on that too. If you’re making your repayments on time, not incurring late fees or breaching the interest-free period, it could actually improve your credit score.

Your sensible and prompt repayments have shown banks you are a reliable borrower. Nice work!

The Student Edge Take.

Some people are happy to use BNPL apps, while others are a little more wary.

At the end of the day, you know yourself the best, and if you think you will forget to make a repayment, then maybe BNPL isn’t for you. On the other hand, if you’re more of an organised person, go for it.

Finally, always be aware of your own financial means and act accordingly. It’s easy to spend someone else’s money, but they will always come knocking for it.

So, be sensible and don’t overcommit to spending money you don't have, no matter how nice those shoes are!

Header Image: ferrentraite via Getty Images