Why the new buy now pay later rules are long overdue
By Rebecca Jarrett-Dalton
Under recent changes to consumer protection legislation, the providers of buy now pay later (BNPL) schemes will need to hold credit licences and comply with a modeled version of the stringent regulations and prudent lending criteria as other finance intermediaries, like banks and lenders.
They will now have to assess a customer's suitability for the agreement before providing it.
It never made sense that a teenage retail worker could sign up you up for a potential liability that can have profound impacts on your borrowing capacity, credit score and cash flow.
And yet a mortgage lender or a broker has an obligation to assess your affordability for a much more valuable asset, even considering potential changes in circumstances.
You'll argue the sums involved are vastly different and you are right, but equally there's a vast difference in the outcome. One sees you with a roof over your head and the other might be a new pair of jeans or a haircut.
The biggest challenge we see as brokers around BNPL is they can be stacked - there's no consideration for repayments you're already making when the new facility is provided. Effectively you can sign yourself up for a number of facilities where the total repayments consume or exceed your income for the period. Inevitably, you then rely on another facility to make ends meet.
The repayments are often reasonably small, but add a few of them simultaneously and suddenly you can't afford to buy groceries. You're then resorting to a different type of credit and the cycle perpetuates. If you miss a repayment the fees are generally disproportionately high.
It's all good being interest free, but fees or interest are costs all the same.
There's also the matter of suitability.
How can it make sense to pay off a pizza over four equal fortnightly repayments? When pizzas, meat and other small ticket consumables became available under BNPL, the problem was highlighted.
While there's a reasonable argument for larger purchases like car repairs, items that are consumed well before the repayments are made just does not make sense.
You could argue that they are no different than using a credit card, and this is true.
But the accumulation of cards is tested and limited, and there are evident consumer warnings about the true cost of the card if you're only making minimum repayments. Not to mention that the repayments rarely take up your entire pay.
BNPL schemes coming under greater scrutiny will seem a great inconvenience to consumers at first, but the positive effects to your credit history, cash flow and financial management will last a lot longer than the new shoes you would have bought.
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