Afterpay has taken Australian shoppers by storm, with more than 1 million customers and almost five million transaction being made since its launch in 2015.
But there’s no such thing as a free lunch, and even a payment platform that promises you can shop now, use now and pay later – interest-free – has its downsides.
Let’s take a look at some of the traps an Afterpay user might fall into, and what they can mean for your bank balance.
Afterpay won’t affect your credit score, unless…
There is no credit check before you apply for Afterpay and it won’t affect your credit history - as long as you use it responsibly.
However, Afterpay reserves the right to perform credit checks and to report negative activity on your account to credit ratings bureaus, which could result in a black mark on your record, just like with any other source of credit. This includes things like late or missed payments, defaults or chargebacks.
It’s also worth noting that because there is no credit check, positive use won’t officially go toward helping you build up a good credit history either. So if you always meet your payments promptly, you could think of Afterpay as credit rating neutral.
The approval algorithm is a mystery
One of the common complaints about Afterpay is that some users are rejected from placing orders, seemingly for no reason. This comes down to the algorithm Afterpay uses to approve purchases.
According to the Afterpay’s terms and conditions, they have the right choose not to approve or cancel an order or product to prevent fraud or they believe the order to be suspicious. Interestingly, Afterpay may also choose to not approve a purchase to protect themselves from a ‘non-payment risk’.
Keep in mind that each approval is decided on a case-by-case basis, so if you’re rejected once, that doesn’t mean you will be next time, but it can be frustrating when there’s no way to tell whether you’ll be approved or not.
As a rule of thumb, the longer you use the platform, the more likely you’ll be approved, so one tip is to start with small purchases to work up a good repayment history and then try out a bigger spend.
Limits on your Afterpay orders
When you sign up for an account, Afterpay will provide you with an ‘estimated spend’ limit, which can typically on the lower side. However, as you continue to use the account responsibly and make payments on time, the more that limit increases.
There are a number of factors that make up your estimated spend, such as how many purchases you’ve made or have going and whether you make your repayments on time.
Fees and charges for using Afterpay
As you probably already know, Afterpay works by splitting the cost of your shop into four, equal payments, which are made every fortnight. But if you miss a payment, or don’t have enough money in your account for a direct debit, you’ll then be charged a $10 late payment fee. If a week goes by and you still have an outstanding balance, you’ll be charged another $7 fee.
If you have outstanding orders, you won’t be able to make a new purchase. And if you get into trouble with more Afterpay purchases than you can handle, there is a hardship program available.
And as of June 2018, Afterpay introduced caps on late fees which means you'll never pay more than $68 in late fees on top of your repayments.
Using Afterpay with a credit card can mean trouble
According to Afterpay, nearly 90% of its users pay for their purchases using a debit card. This is a smart move, because if you have your account linked to a credit card and let payments get away from you, what was a free take-home layby scheme can quickly become a money drain.
For example, say you make a purchase of $800 of flights on Afterpay using your credit card. The $200 instalments will be charged to your card – but if you let them build up on your credit card balance, it can wind up being just as bad for your credit history (and wallet) as if you had bought the flights using your credit card directly.
Which regulations apply to Afterpay?
Some finance experts have expressed concern over just which regulations apply and what kind of protection shoppers have. Here’s what we know so far.
Afterpay is regulated under the Payment Card Industry Data Security Standard (PCI DSS), which is the same regulatory standard applied to major credit card brands. You’re also still covered by consumer protection legislation, which includes things like the right to a refund for faulty goods.
In January 2020, many BNPL platforms, including Afterpay were asked to sign a ‘Code of Conduct’, issued by the Australian Finance Industry Association (AFIA). The code set out to provide guidelines and the minimum standards BNPL’s must abide by. This included capping or waiving late payment fees, restricting customers under the age of 18 and no longer approving purchases when a customer is experiencing financial hardship.
According to ASIC, this self regulating code is set to come into effect in March 2021.
However, many experts argue there is more to be done to ensure vulnerable customers are protected.
A recent ASIC report found that during the 2018/19 financial year, 20% of Afterpay’s revenue came from missed payment fees.
“If the buy now pay later provider’s data indicates that consumers are paying missed payment fees repeatedly, for example, or that these fees represent a significant proportion of the amount borrowed, the provider will need to consider why this is occurring… and how this can be addressed,” said ASIC.
This promoted ASIC to take things into their own hands.
From October 2021, BNPL platforms must comply with ASIC’s ‘design and distribution obligations’. This means that BNPLs, like Afterpay, will need to make more an effort to identify its target market and regularly asses whether their product is a suitable choice for a customer.
ASIC mentioned that any further regulation will need to be signed off by the government or even Parliament. But not everyone is on board with the idea.
Afterpay co-founder, Anthony Eisen argued that further regulation would be “dangerous” as its ‘one size fits all’ approach has the potential to “stifle innovation and competition”.
It’s also worth mentioning that Afterpay is exempt from the National Consumer Credit Protection Act (NCCP), which is designed to enforce ethics and protect consumers in the finance industry. Other examples of the point-of-sale exemption you might be familiar with is the “interest free loans” at shops like Harvey Norman.
What about refunds?
In a nutshell, Afterpay doesn’t deal with your refund. Instead, if you need a refund, exchange or return, then you need to deal with the store directly.
Once your refund is approved, the store will let Afterpay know, and it’s only then that you’ll receive any money back from Afterpay. In some cases, this might mean you’re charged for a payment, even after you’ve sent your purchases back, but once it’s entered into the Afterpay system, you’ll receive your money back, or your Afterpay total will be adjusted accordingly if you’ve only returned part of an order.
How to use Afterpay responsibly
There are a few simple things you can do to make sure you’re managing your Afterpay account properly and reducing the risk of running into financial trouble.
- Stick to a budget. Although Afterpay’s approval algorithm is designed to stop you biting off more than you can chew, it’s a good idea not to rely on this. Make sure you crunch the numbers on your budget and work out how many purchases you can realistically pay off at once. It’s a good idea to set aside money for bills and expenses, some for savings, and then anything that’s left over is your Afterpay budget.
- Use a debit card. Steer clear of a mounting credit card balance by only linking your debit card up to Afterpay. This way, you can spread big costs out to make them more manageable, but you’re still only spending money you know you will have in the future (that is, if you’re sticking to your budget!)
- Reschedule your payments if necessary. If you think you won’t be able to make an upcoming repayment on time, Afterpay allows you to reschedule your payment, shifting them for up to five days with each update. Doing this can help you avoid a late fee and any negative activity on your account. Just keep in mind that you are only able to do this three times a year.
Want to read more about Afterpay? Head over to read our Afterpay report.
This guide was written by Ceyda Erem and Kelly Emmerton