I can see the attraction of buy now pay later arrangements – it’s seductive to buy something you want right now, and pay it off in instalments whilst believing there’s no extra cost or interest.
The arrangements are particularly attractive to those unable yet to get a credit card, such as young people.
Yet in reality, “one in five consumers are missing payments”, according to research released by ASIC on Monday.
Behavioural scientist BJ Fogg found that all habits, including bad habits, start small and find a good spot in your routine.
Just like addictive substances, credit is a slippery slope of instant gratification and convenience.
Once we become accustomed to paying off rather than saving for, we can easily slide to borrowing larger amounts.
Next stop – a credit card
“A meaningful proportion of buy now, pay later customers have plans to apply for a credit card in the medium term”, according to research by Citi.
The next step of the revolving loan of a credit card is dangerous with over 40% of people unable to repay in full each month (source: ASIC).
And then more debt
ASIC found that “15% of consumers surveyed said they had taken out an additional loan…in order to make their buy now pay later payments on time.” Half of those were aged between 18 and 29.
Credit cards can spiral into larger personal loans, which can lead to being unable to get a mortgage. Or worse, it can lead to the financial ‘death’ of bankruptcy.
That may sound dramatic but the number of personal bankruptcies in Australia each year is ten times the national road death toll! We need to be as careful with our spending as with our driving.
ASIC found that the number of BNPL transactions increases in the period leading up to and including December every year.
I know that COVID-19 has affected the income of many of us, but as we approach the festive season I encourage you (and those you care about) to resist using the pandemic to justify using buy now pay later – it’s too precarious.
To get the most life out of your money save for rather than pay off and look for other ways to give Christmas magic on a budget.