Does Buy Now Pay Later debt impact your future borrowing power?
Last week, the Australian Prudential Regulation Authority APRA announced that banks and lenders must now consider Buy Now Pay Later (BNPL) debt, as well as any outstanding HECS-HELP debts, when offering loans, stating that:
"To ensure a consistent approach is taken across industry, APRA has clarified below that HECS-HELP loans and debt incurred through BNPL schemes would be included in DTI ratios."
Wait, what is debt-to-income ratio?
DTI or debt-to-income ratio is the ratio of the credit limit of all your debts to your gross pre-tax income. It is a key deciding factor for lenders when you apply for a mortgage.
APRA has clarified that from September, lenders’ assessments must “include the credit limit of any debts, such as other mortgage lending, personal loans, credit cards, consumer finance, margin lending, buy now pay later debt, Higher Education Loan Program (HELP) or Higher Education Contribution Scheme (HECS) debt, and any other debts held by the borrower, to any party, to the extent this is known to the ADI.”
Before this announcement, BNPL was a grey area for lenders, often not considered debt, as the payment platforms do not fall under the National Consumer Credit Code.
The new APRA guidelines are the latest suggestion of big changes coming in BNPL regulation.
Recently, financial services minister, Stephen Jones said to The Guardian that he plans to "start working on regulating [BNPL] within the credit space".
Getting on top of BNPL and the missed payments problem
These movements towards regulating BNPL as a credit product come as many Australians struggle with their BNPL repayments.
The fee-free nature and ease of access of many BNPL platforms make them an easy alternative to cash or card payments, but with 1 in 5 Aussies cutting back on essentials to make BNPL repayments, the reality might be setting in.
With missed payment revenue totalling $43 million for BNPL providers in the 2018-2019 financial year, more and more Aussies are finding themselves in this new form of debt.
So, if you’re looking to buy a home in the near to somewhat-near future, it would be a good idea to take a look at your BNPL spending, as well as your HECS balance.
If you feel like you’ve overdone it on BNPL and your debts are getting on top of you, it’s important to pause all BNPL shopping and most likely avoid frivolous shopping altogether. There are amazing resources to help you get your finances back on track, such as the National Debt Helpline, as well as Mozo’s budget calculator.
Looking to make an informed BNPL choice? Check out the best BNPL providers with our Experts Choice Awards and our guide to the dos and don’ts of shopping with Buy Now Pay Later.