Pitfalls to avoid using “modern layby” services to buy now, pay later

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You’re probably already familiar with the concept of a layby, but over the last 12 months or so, you might have started hearing about post-pay platforms like Afterpay being introduced at your favorite retailers. Dubbed the “modern layby” these platforms allow you to shop in-store or online, take your purchases home, and then pay them off in installments.

Sounds great right? Well, the option to buy now and pay later may be tempting and can be a useful budgeting tool, but it can also be a debt-trap for unsuspecting shoppers. Afterpay launched in Australia in 2015, so we’ve had these services for a few years now – long enough to take them for a test drive and work out some of the traps and pitfalls of post-pay.

If you’re thinking of signing up for a modern layby as it takes off in the US, here are some of the rules we’ve learned to live by when it comes to buying now and paying later.

Don’t spend more than you can afford

In the Mozo 2018 Afterpay report, a massive 64% of buy now, pay later users said that the option to make smaller payments spread out over time influenced them to make extra purchases. That’s a slippery slope, and can lead to you overspending without really realizing how much is coming out of your account.

So, protect your finances by making sure you’ve got a clear idea of your budget, and that you’re thinking about the final price tag of each post-pay purchase, not just the installment price. You should think of post-pay services as a budgeting tool, helping you spread that cost out over time, not as an excuse to spend more than you normally would.

Avoid getting hit with late fees

If you use your post-pay account responsibly, it can be a great way to spread out the cost of big purchases, without paying extra for the privilege. But if you don’t keep a close eye on your repayments and repayment due dates, late fees could bite. According to regulatory body ASIC, in Australia, late fees ranged from $4.99 to $15, which may not seem like much, but can quickly pile up if you make a habit of missing payments.

Most post-pay platforms will allow you to set up automatic payments, which is a great idea to avoid late fees. Just make sure that you have enough money in your bank account to cover each automatic installment without overdrawing, or that you’re paying off your credit card bill each month. Which brings us to…

Think twice before linking up your credit card

Well, ok, you can link up your credit card to your post-pay account, but make sure you think it through first. Paying off your purchases using your credit card adds another layer of risk to buy now, pay later platforms because even if you make your Afterpay payment on time if you don’t then pay off your full credit card bill, you wind up paying interest and fees anyway.

If you are using a credit card with a post-pay service, pay attention to your monthly credit card statement and due dates. And if you just want to avoid the risk of paying interest altogether, consider simply linking your post-pay account to a debit card instead, so you’re only ever using your own money.

Don’t expect a quick refund

So you made your purchase, got it home and realized it’s not right after all? Well, don’t expect the post-pay service you used to be as speedy to refund the money as it was to take it out of your account.

In most cases, you’ll be responsible for returning your purchase to the retailer; then, when they’ve agreed to a refund, the post-pay service will credit the money back to your account. A few things to keep in mind:

  • Until the retailer lets the post-pay service know about the return, you’ll still likely be responsible for meeting repayments. That could mean an automatic payment is taken out of your account, even after you’ve returned the goods. That can be straightened out, but it will make the process of getting a refund longer.
  • The refund may be credited to your post-pay account and go towards repayments on other purchases you’ve made – so you won’t necessarily see it back in your bank account.
  • You won’t be refunded any fees you paid, like late fees, even if you return your purchase.

Beware of your credit score paying the price

Some post-pay services, like ZipMoney, may perform a credit check before you make an account, and others, like Afterpay, usually don’t. But even if there was no credit check, in the beginning, don’t think that your credit score is untouchable.

Most services reserve the right to do a credit check and to report any missed payments to credit reporting bodies. For example, in Afterpay’s US terms and conditions, it states “you authorize Afterpay to make, directly or through third parties, any inquiries it considers necessary to verify your identity and assess your capability to make payments according to the Payment Schedule in relation to all orders placed using the Installment Feature.” This could potentially include a credit check.

In Australia, The Australian Retail Credit Association (ARCA) has pointed out that post-pay services aren’t regulated in the same way as traditional credit card or loan companies are, was a serious concern. It wrote that “…these products are not subject to responsible lending obligations.” It’s likely to be a very similar situation in the US.

So it’s really up to you to make sure you’re able to comfortably meet repayments on buy now, pay later services so that it doesn’t impact your credit and cause problems in the long run.

The last word

Ultimately, post-pay services like Afterpay can be a great tool to help you spread out the cost of purchases and manage your budget better. But as this list of pitfalls makes clear, it is vital to make sure you understand the traps and fine print before you get started, so you can buy now, pay later the smart way.

About Kelly Emmerton

Kelly Emmerton is the Money Editor at Australian financial comparison site Mozo.com.au. She’s an expert in all things personal finance, from the latest in new payment methods to the nitty-gritty details of travel insurance policies.