What is AfterPay? and should you use it?

If you’ve been shopping online recently you may have noticed something different when you go to pay. 6 new words below the buy now button. “or 4 easy payments with afterpay”. What do these six words mean, and should you use them?

I’m not sure how long afterpay has been around. And I didn’t know much about it. To be honest- I have generally ignored them if I’d purchased something online. But afterpay seems to be everywhere now. TradeMe even has afterpay. Even the smallest of purchases seem to have afterpay.

I first learned about afterpay from a friend that I’ve been helping out with his finances. Not directly helping him- but by listening to his financial problems and keeping him motivated.

After several years of changing jobs and cities, and starting a family, my friend found himself with a tonne of debt on his credit card. He confessed that he was struggling to just get by with this debt handing over him. The interest was racking up and he was losing time sleeping- as well as time with his family. He was working every day of the week to keep his head above water. He’d essentially become a wage drone.

To help him out I decided to have a monthly catch up. Over a beer, we would discuss tactics on how to get rid of his debts. We decided it would be a good idea to transfer his debt to an interest-free credit card (the interested free generally only last a year- and they are sneaky in that any repayments go towards paying off any new credit that you rack up on the card, rather than the original balance transferred), set up some automatic payments so he could pay himself first. Payments for rent, groceries, and debt repayments. And under no circumstanced was he to use this credit card- at first, he left it at my place for a while.

We budgeted a small spending allowance for him and his wife that they would withdraw in cash every pay cycle. After all, you have to keep yourself happy to stay motivated. And I kept reminding him that this situation would only be temporary

Long story short- after about 11 months of paying down his debt he was free. The credit card was destroyed and we celebrated with a BBQ.

Several Weeks Later

Several weeks went by and one day he called me to ask if I’d help him install a radio into his car. I said sure- come over in the weekend.

When he came around I again congratulated him on getting rid of his debt and saving for a car stereo that he’d been wanting for a while. Mainly so that the kids could be entertained on longer trips. That’s when I found out that he’d put it on afterpay.

Afterpay? what the hell is afterpay- I asked. He explained that afterpay is a service that lets you pay in instalments like hire purchases but with no fees or interest. Straight out of the gate I thought this sounds fishy- how are they making money if they are not charging interest or fees? They must have some serious late penalties.

Neither of us knew if there were penalties or late charges for missed payments- which is alarming, to say the least. How many people are signing up for this service not knowing what the late fees or penalties are for missing a payment?

Afterpay- What is it and Should you use it?

On further research- afterpay has been around since 2017 promising interest-free terms of up to 8 weeks. There are now more than 400 NZ retailers using the service. There’s even an app.

It’s a digital service that makes it possible to buy products now and pay them off in 4 fortnightly instalments. You’ll get your stuff now, and pay later. In the best scenarios- it’s said that you will pay nothing more than you would if you’d use cash.

Basically, from what I’ve read this is how it works. You sign up for an online account- download the app- add a credit or debit card- search the app for any physical retailers that you want to use afterpay with. The app will show you the max you can spend at a particular store. Then you go to the store and buy your goods and scan the barcode in the app.

So what’s the catch?

Sure- afterpay is interest-free, and there are no setup fees. But if you miss a payment you’ll have to pay a healthy fee. If you have not made the payment before the due date, or the automatic payment fails, you have until 11 pm the following day to make the payment. If you don’t then you will incur a late payment fee of $10 and a further late fee of $7 if the payment is not made within the next 7 days.

I couldn’t find a clear answer if this $7 fee continues for the following weeks. But I did find out that afterpay caps their late fees to never go higher than 25% of the item purchased or $68 dollars, whichever is less.

It all sounds reasonable until you consider what the annual interest is on a $10 initial and $7 weekly late fee. If you consider a $100 purchase and a $7 weekly fee- the annual interest charge is essentially 364%.

Is afterpay making all it’s money on Late Fees?

I’ve always been suspicious of services like afterpay. Every company needs to make money- so how does afterpay make their money. On the surface, I would have guessed that they are making money on late fees- praying on people who can least afford to pay for late fees.

However, they do state that they are responsible lenders and cap late fees, and don’t approve all purchases. They also state that late payments are bad for their business and cost them extra to try and chase up the payments.

According to their own statistics, 78% of their customers have never incurred a late fee. And that the majority of their revenue comes from charging retailers. Retailers generally like the afterpay service as it makes it easier for customers to purchase products.

afterpay or credit card?

So it all sounds like afterpay is kinda like a credit card for retail purchases, but there are some benefits with afterpay over a credit cards

• There is no annual fee for afterpay- yes there are credit cards with no or low fee aswell.
• Credit cards don’t discriminate- you can purchase anything from anywhere- afterpay uses an “algorithm” to approve your purchases based on your history and any current afterpay purchases yet to be paid off.
• Your afterpay account is suspended if you miss a payment- if you miss a payment on a credit card you can still make more purchases as long as you have a remaining balance available.
• Afterpay charges no interest if you default on your purchase
• You have a total of 42 days to pay off your product- in regular fortnightly payments- whereas you have 45 to 55 days interest free on your credit card
• afterpay caps their fees at 25%- credit cards go on to charge you 15-30 per cent annually

Conclusion

I started off looking into afterpay as a service praying on people with bad credit, giving them small loans and charging them hudge amount in late fees. After looking into the service that isn’t exactly true. There does seem to be some good aspects to afterpays service, and even some benefits when compared to credit cards for non-essential purchases.

But just like a credit card- afterpay normalises debt. You should always avoid debt if you can- even if you’re not being charged interest. And just like credit cards- afterpay makes impulse purchases easy.

I still think the best way to purchase anything is to save upfront and only buy what you need. That way you don’t end up spending beyond your means.

So what do you think about afterpay? have you used it?