How can struggling spenders get on top of their buy now pay later debt?

A new report reveals Australians almost doubled the amount of credit taken out via buy now pay later providers in the 12 months to June 2019, with many struggling to scrape together the funds to pay back their debts on time, missing payments for household bills, credit cards and mortgages, and even cutting back on meals. It could be time to pull the plug and aim to build your own version of a buy now pay later facility to help quit this habit, an expert warns.

ASIC released a report on the buy now pay later (BNPL) industry on 16 November, which revealed the substantial growth to the sector. The number of buy now pay later transactions increased from 16.8 million in the 2017-18 financial year to 32 million in 2018-19, representing an increase of 90%.

Notably, ASIC found than one in five consumers in the past year had missed or were late paying other bills in order to make their BNPL payments on time. Missed payments included things such as household bills (44%), credit card payments (32%) and home loan repayments (22%).

ASIC also found some consumers were experiencing financial hardship in an attempt to make BNPL payments on time, with reports of people cutting back on or going entirely without essentials such as meals, or taking out additional loans.

Despite these endeavours, 21% of BNPL users surveyed said they’d missed a payment in the last 12 months, adding $43 million to the pockets of BNPL providers from missed payment fees during the 2018-19 financial year, an increase of 38% compared to the previous financial year.

And the debt pile-up often flows through to credit cards, where ASIC found between 38% to 43% of buy now pay later users who also had a credit card used over 90% of their allocated credit limit on their cards for each month between October 2018 and January 2019. In the same period, only 16% to 18% of other credit card users (those that did not make any BNPL transactions during that period) did so.

How to reduce or clear your buy now pay later debt

Canstar money expert Effie Zahos said if consumers wanted to reduce or clear their BNPL balance after noticing a habitual change in their spending behaviour, it could be time to pull the plug, stop the spending and try to build your own form of a BNPL facility that doesn’t rely on another credit provider or rack up late payment fees and interest charges.

“Set yourself up an account, call it ‘buy now pay later’ if you want, put $1,000 in it, use it that same way you would a service like Afterpay and you’ll probably find you won’t spend as much once you actually have to spend your own $1,000 up front,” Ms Zahos suggested.

“There’s always more hurt when it comes to using your own money and it makes you think twice.”

She said it was important to look out for red flags in regards to your spending behaviour.

“If you’re late making payments, you’re juggling a few payments, if you’re living from pay to pay, then that’s a problem and you need to make some changes,” Ms Zahos said.

She said it can be hard for some to immediately break the habit, but a good place to start could be to take a look at what you’re using the service for. If it’s for non-essentials like buying another pair of shoes, then that should be an easy cut.

For those stuck in a cycle of relying on buy now pay later services to pay for essentials due to a sudden change or emergency, it might not be easy to suddenly stop using them.

“It could be worth reaching out to the service provider to learn more about their financial hardship policy or getting in touch with a free financial counsellor for advice to help get back on track,” Ms Zahos said.

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Consumers may turn to buy now pay later schemes this Christmas

QUT spending behaviour expert Gary Mortimer told Canstar that some consumers who are tempted to use BNPL schemes to spend more in the lead-up to Christmas might find it becomes so convenient that it then turns into a habit.

“It’s very difficult to break out of that cycle if you’re not the type of consumer that is good at balancing their income and their liabilities,” Professor Mortimer said.

He said consumers have intentions to buy a product but there’s often a barrier between that and their actual purchase behaviours. Sometimes that barrier is a financial barrier where you might want the product but can’t afford it.

“Buy now pay later products provide almost a bridge over that barrier that says ‘well look, you can have that product now and just pay for it later’,” he said.

“If you’re able to use these buy now pay later products appropriately and you have a history of being able to service that debt frequently and still live comfortably, you shouldn’t have any major problems.

“However, when you’re making that purchase in the store, as tempting as that is, if you already know your credit card is maxed out I would recommend you don’t facilitate a buy now pay later program because you’ll struggle.

This article was reviewed by our Sub Editor Tom Letts before it was published as part of our fact-checking process.