THE PRO’S AND CON’S OF AFTERPAY

Afterpay, it’s everywhere, take the goods now and just make 4 easy payments, it's that simple.

With the rise in BNPL (Buy Now, Pay Later) services an increasing number of clients are asking me if these options are a good idea.

My advice is always the same, if you have cash, pay cash, it may only be a few weeks of payments but none of us have crystal balls and we can all recall hindsight moments in life. It doesn't take much to upset the best of plans so cash will always rule.

That being said sometimes these options may feel like the only choice. I hope this article highlighting the pro’s and con’s of Afterpay based on a few client experiences and also my understanding of the finance world will help you make a better informed decision if yo are thinking of using them.

Afterpay is still a useful tool for working with your money in the modern world, but not all tools are fit for purpose.

Like every tool it is important to understand whether it is helping you or possibly creating problems for you in the future.

First a quick flashback to shortly after Afterpay started in New Zealand

I remember a client becoming quite upset at the effect Afterpay had on the progress she had made with her personal finances prior to using it.

When commencing her coaching program, savings didn’t exist. Saving for Sandy seemed an impossible task no matter how hard she tried.

By the end of Sandy’s 1^st months of coaching, not only had all her bills been paid on time but she had accumulated close to $800 in savings. She was over the moon.

By the end of the following month however most of that $800 had disappeared. Thanks to Afterpay.

The simple access to money without the need for credit checks meant Sandy could buy things easy, and the thought of a few dollars each week seemed manageable especially given Sandy now had savings.

The reality is those payments added up very quickly.

Why do I retell that story? Because for anyone reading this article who thinks that they cannot save, therefore Afterpay is a lifeline, I want you to know even though it feels like you can’t save, it is possible with the right guidance.

Sandy discovered that for herself but also discovered very soon after how easy access to money can strip away your savings just as fast.

Anyway, this isn’t about recommending you do or don’t use facilities like Afterpay, the point is for you to consider aspects both good and bad and making an informed decision whether it is something you wish to use (or continue using).

Let's get into the details, the Pro’s and con’s of Afterpay.

First the Pro’s (the good things about Afterpay)

1. You get to take the items with you today
2. The payments are split up over 4 or sometimes 8 payments
3. There are no additional charges as long as you make your payments on time
4. It is better than using your credit card. Using Afterpay you are aware of the required payment rather than being surprised with a big credit card balance at the end of the month

Now for the Con’s (the not so good about Afterpay)

1. You are using a finance platform and charges for missing a payment can be hefty compared to what you actually bought.
2. You need to create an account and in doing so become subject to continued marketing which encourages continued spending (remember they are a finance company and make money by you spending)
3. You can’t pick the day the payments go out of your account, (some platforms allow you to do so after a 6 or 8 week period but by this time you could already be starting to miss payments)
   The system does this based on your purchase so unless you have a really disciplined budget and always have surplus money in your account you have a high risk of a missed payment, going into overdraft and attracting penalties.
4. You might be spending money you don’t have. What happens if that overtime doesn’t eventuate or that bonus? Is the stress and extra cost really worth it?
5. Afterpay’s internal system is designed to encourage spending and more debt. If you are a good payer they aren’t making money off you and will increase your approval limit enticing you to use it more often.
   And because it is so easy to do and you are on their marketing list, most people will. At some point that picture will change. It’s similar to how credit cards work and we all know how much of a trap they can become.
6. Continually using Afterpay negatively impacts your ability to borrow for more important things like a home even though their FAQ section will tell you it doesn’t. Their opinion is that it shouldn’t, but I continually hear from advisors that banks think different.
   Banks see the continued use of this as a risk. If someone can’t be disciplined to save money for 4 weeks and pay cash, is their debt reliance a risk to the lender?
7. You will often spend more than you need to. When you can take the goods now and deal with the payment later, you will often buy more things on impulse.
   When using your own money, you often try to protect your savings and will think twice before you spend.

How do you break the habit?

If you have been using Afterpay and on review of the above think small payments are still a good idea, then why not become your own bank.

This is what I coach my clients to do by understanding their minimum savings capacity and making that part of their budget. You can use my free calculator here to check out yours.

As you complete any current payments continue to put the equivalent amount into a separate savings account.

Then next time you are tempted to use Afterpay withdraw the full amount from your savings account and pay once and then continue to replenish the savings account with your ongoing deposits.

Clients who have taken the above steps often find that because they are now using their own money, impulse purchases begin to reduce and their purchases become more intentional.

If you have been using Afterpay and would like to break out of the cycle here is a couple of helpful articles you might like to check out. ‘Building a Rainy Day Fund’ or ’10 Simple Money Saving Strategies’