Pros and cons of Afterpay

If you are considering a buy now pay later service, you may be wondering – is Afterpay good? Here, we weigh up some of the pros and cons of using Afterpay to help inform your choice.

Afterpay is one of several buy now pay later (BNPL) services in Australia, and while it can offer speed and convenience, there are a number of important things to keep in mind before using it, and a number of potential pitfalls to be wary of, including the potential for impulse spending, and a lack of consumer protections in the sector.

Here, we evaluate some of the key pros and cons of the service, to help you decide whether you might use it for your own shopping purposes.

The pros of using Afterpay

Afterpay has a large range of partnering retailers and no interest or fees involved for customers who pay on time, both of which can make it appealing to consumers as a payment option. Other potential pros of using the service include:

Immediate use

Customers are able to set up and use their Afterpay account almost instantly, rather than going through the lengthy application process they might experience when taking out a loan or credit card, for instance.

Generally, the application will require you to provide a phone number, email address, payment method and address details to sign up. Afterpay currently accepts Mastercard and Visa credit and debit cards issued in Australia.

This signup process may seem surprisingly easy, but the ease with which you can sign up to Afterpay can also be one of the main pitfalls, especially if you are unable to make your required repayments. This will be discussed in further detail in the ‘cons or using Afterpay’ section.

Seamless integration within stores

Afterpay says it is fully integrated within an online store’s checkout process, which ensures easy usability. All purchases are repaid in four equal fortnightly instalments over six weeks, starting with the first one at the time of purchase.

Once you have your account set up, you can simply opt to pay with Afterpay at the checkout. The payment plan will be arranged for you, with details sent straight to your email inbox.

Fee and interest-free terms

Afterpay says it doesn’t charge any interest on your repayments, and claims that the majority of its revenue comes from the fees that merchants pay to partner with it. This means that customers can avoid application fees when signing up, and will only pay the purchase price of the item they buy, as well as any late payment fees.

That said, if you use a service like Afterpay, it is important to keep track of your spending and make sure your repayments are made on time, as late payment fees can add up if you fail to make your repayments in the required fortnightly instalments. More about this will be discussed in the ‘cons’ section.

Available at physical stores

In addition to being available online, Afterpay is available across a broad array of physical retail outlets across Australia and New Zealand, and following its 2022 purchase by US company Square, it is also available at many more outlets globally.

To use it in store, you will need to download the Afterpay app, set up an Afterpay Card and then load it into your digital wallet. You can use the Card tab on the app to find retail outlets that accept Afterpay in-store.

To make a purchase in store, select the Afterpay Card in your digital wallet, and tap to pay with Apple Pay or Google Pay. You’ll pay 25% at the checkout and the rest in fortnightly instalments over the next six weeks.

Clearly set-out payment schedule

When you pay for a purchase using Afterpay, your balance after paying the initial 25% at the checkout is split into three fortnightly instalments, which will be automatically charged to your nominated debit or credit card, meaning you will not need to create your own payment plan.

You will be emailed a copy of your payment schedule, so you can make sure your bank account is prepared for those payments each fortnight, or even pay ahead of time if you choose to do so. The convenience of having a payment plan created for you could be appealing.

Potential alternative to using a credit card

If you use a credit card to make purchases that you would not otherwise be able to make upfront, then switching to Afterpay could be a possible alternative, as you will avoid interest fees, though you could still be charged late fees for missed payments.

Even though you can avoid paying interest by using Afterpay, it is still a good idea to stick to your budget, to make sure you can afford to spend that money.

There is a spending limit for some shoppers

Afterpay has an automated system that decides how much money you’re approved to spend, which is based on a number of different factors. According to Afterpay, spending limits start at around $600 and only increase gradually when customers demonstrate responsible spending behaviour.

The longer you have been a shopper using Afterpay and the more orders you have successfully repaid, the more likely your spending limit will be increased. This is a potential positive if you struggle with budgeting, as the temptation to overspend could be mitigated by a lower spending limit.

The cons of using Afterpay

While Afterpay may be able to offer a degree of convenience to consumers, there are a number of important things to be wary of if you’re thinking about signing up, and some risks and downsides to consider. Some of these cons include:

Lack of consumer protection

According to the National Debt Helpline, BNPL lenders are not as strictly regulated as other kinds of lenders. For instance, they are not covered by the National Consumer Credit Code, which means that they don’t have the same legal obligations as banks and other lenders.

This means that BNPL prodivers are not obliged to check to make sure you can afford your repayments, in the same way as credit providers are, nor are they obliged to offer financial assistance when things go wrong.

Likewise, BNPL providers are not obliged to be members of the Australian Financial Complaints Authority (AFCA), a free and independent dispute resolution scheme.

At present, BNPL providers can voluntarily sign up to a BNPL industry Code of Practice, but they are not obliged to do so, and this means that overall, consumer protection in the sector is relatively limited, compared with the protections consumers get from other lenders such as personal loan and credit card providers.

Potential to encourage impulse spending

It’s a common concern for anyone on a budget – impulse spending can break the bank and leave you with an item you can’t realistically afford. This problem has the potential to be magnified by interest-free payment plans, which can seem appealing, but can encourage poor spending habits.

If you can meet your fortnightly repayments and consider what you can realistically spend before you make an Afterpay purchase, you can avoid being burdened with retail debt. But if you are on a tight budget, or are conscious of trying to cut your spending, Afterpay could tempt you towards impulse purchases.

The National Debt Helpline cautions that BNPL can make it easy to spend more money than you can really afford.

“The purchase cost can seem cheaper when you split it up into smaller repayments,” it warns, “but many people lose track of how much is due and when (particularly if you’ve made multiple purchases on different days and are using more than one BNPL account). You could quickly get caught spending far more than you intended or more than you can afford to repay.”

Late payment fees

Once you enter into a payment plan with Afterpay, you could face late payment fees if you fail to make your fortnightly payment instalments. A customer may be charged a $10 late payment fee from Afterpay in the first instance, and another $7 fee if they don’t pay that instalment amount within seven days.

Caps are in place for late fees. For each order below $40, a maximum of one $10 late fee may be applied per order. For each order of $40 or above, the total late fees that may be applied are currently capped at 25% of the original order value or $68, whichever is less. It is important to be wary of the fact that late fees can compound quickly, especially with multiple purchases, and what seems like a small amount of debt can quickly grow large.

Potential negative impact on credit score

On its website, Afterpay advises that your credit score will not be affected by using its products, as it only runs ‘soft’ credit checks on customers, and does not report your repayments to credit reporting bureaus. Even so, it could still pay to be mindful of the broader impact that using BNPL services could have on your credit score.

Given the factors mentioned above, such as the temptation to spend more than you can afford, and the potential for late fees to pile up, using BNPL services like Afterpay can put a strain on your finances. This, in turn, could make it more difficult to pay bills and repay other loans on time, which could ultimately impact your financial health.

One important thing to keep in mind is that Afterpay can be linked to a credit card. If you overspend on Afterpay transactions, you could therefore end up owing more on your credit card bill than you can pay off, leading to high interest charges and potential defaults on your account, which can hurt your credit score.

If you are late with repayments on loans, credit cards and bills, your credit score will be lowered and this will have an impact on your ability to obtain credit products like car and home loans in the future. This is especially important to note, given that Afterpay can be linked to your credit card, meaning you may face interest charges and de

Therefore, when using a BNPL service like Afterpay, it is important to consider the overall effect on your financial health.

Cover image source: T. Schneider/Shutterstock.com