Pros and cons of Afterpay

It seems the days of holding all your Christmas presents on lay-by at Big W are disappearing – or are they simply returning in a different form? Across Australia and New Zealand, 3.6 million people in FY21 made use of Afterpay’s modern approach to lay-by, where you take home an item immediately and pay for it later in four equal fortnightly instalments.

Available to consumers both online and in-store, Afterpay has clearly hit a winning business model, having expanded to the UK (where it’s known as Clearpay) and the US, and notching up over 16 million customers globally. It’s not a bad result for a company that first launched in 2015.

So with all the hype, we thought it would be worth noting a few of the pros and cons of this modern payment option, to help you decide whether it’s worth using it for your shopping.

The pros of using Afterpay

With a huge range of partnering retailers and no interest or fees involved for customers who pay on time, Afterpay can make for a pretty enticing payment option.

Below are some of the main benefits of using Afterpay:

Immediate use

Customers are able to quickly 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.

All you need to enter is your 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.

Does this purchasing process sound too good to be true? It could be, if you are unable to make the necessary payments on time (see the ‘cons’ section for more information).

Seamless integration within stores

Afterpay says it is fully integrated within an online store’s checkout process, which ensures easy usability. There’s also no need to keep track of complex payment plans – 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 and let them sort out the plan for you – the details should then be sent straight to your email inbox.

Fee and interest-free terms

Afterpay says it doesn’t charge any interest on your repayments, and you’ll avoid hefty application fees that can be associated with some money lending options.

The Afterpay service prides itself on being free for all customers to use, with the only associated costs for customers being the price of your purchase and late payment fees. Based on data from its latest annual report, the majority of Afterpay’s money comes from the fees merchants pay to partner with it.

Afterpay is not just online

Afterpay is pretty well-known for its seamless integration into online stores. And that’s been a plus for some Australians during COVID-19, when lockdowns have meant it’s not always possible to shop at our favourite stores in person.

If you prefer the experience of being in a shop to try things on or just to compare products in person, Afterpay is available in-store at thousands of outlets. With around 63,000 merchants offering Afterpay across Australia and New Zealand, it’s a fair bet you can use Afterpay at most of your preferred outlets. Head to the Afterpay or individual retailer websites to find out more information on where you can use this service.

How does it work in-store? First you’ll need to download the Afterpay app, set up an Afterpay card, and load it into your digital wallet. Use the Card tab to find shops that accept Afterpay in-store. Then, when you’re ready to make a purchase, select the Afterpay Card in your digital wallet and tap to pay with Apple Pay or Google Pay. You’ll pay 25% upfront and the rest over the next six weeks.

Provides automatic framework for payment

It can be hard to create and stick to your own payment plan sometimes, but Afterpay suggests its payment model can help with this.

Afterpay splits the total amount of your bill into four equal fortnightly instalments, which will be automatically charged to your nominated debit or credit card. 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.

Can be a good alternative to using a credit card

If you would usually use your credit card to make purchases you wouldn’t otherwise be able to pay for upfront, switching to Afterpay for retail spending may be a good option because you’ll 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.

→ Related: Buy now pay later in Australia: A guide to Afterpay, Zip, Klarna & more

The cons of using Afterpay

There is no doubt that Afterpay has given consumers another payment option – one that’s proving to be very popular. But it’s worth bearing in mind some of the risks and downsides of using this service:

Can encourage impulse spending

While interest-free payment plans are an enticing prospect, they can lead to poor spending habits.

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.

The question you need to ask is: if you had the cash to pay for the item in four weeks’ time, would you still spend the money then? The likely answer, in many cases, is no.

However, as long as you meet the fortnightly repayments and consider what you can realistically spend before you make an Afterpay purchase, you can avoid being burdened with retail debt.

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.

The company says that customers who have been with Afterpay for a while, and have made their payments successfully, are more likely to be able to spend more than newer customers or those who have missed repayments on their record.

The upside? If you struggle with budgeting, this could actually be a good thing.

So don’t be too disheartened if you’re not approved to use your Afterpay account for a big spending spree – just think of the dollars you might save instead.

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, however. 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.

If you’re worried about keeping track of your payments, log in to your Afterpay account at any time to make additional payments or change your payment method.

Has eligibility requirements

Afterpay says it will “never do credit checks” on customers or report their late payments to a credit reporting bureau, so using Afterpay shouldn’t affect your credit score.

However, Afterpay’s terms make it clear that the company, or “third parties” it works with, may go through an identity verification process and “repayment capability checks” on you or your account. This may include using third party databases to verify who you are.

The company also says all customers wanting to use Afterpay will need to meet certain eligibility requirements in order to join. These include:

• You must live in Australia
• You must be at least 18 years old
• You must have a valid and verifiable email address and mobile phone number
• You must use a valid Australia bank payment card to make a purchase
• You must be capable of entering into a legally binding contract.

Head to the Afterpay or individual retailers’ websites to find out more information on where you can use this service.

If you’re currently considering a credit card, the comparison table below displays some of the low-interest credit cards currently available on Canstar’s database for Australians looking to spend around $2,000 per month. Please note that this table features links direct to the provider’s website, and is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical). Use Canstar’s credit card comparison selector to view a wider range of credit cards.

Cover image source: T. Schneider/Shutterstock.com