Should you use buy now, pay later credit?

If you are a frequent online shopper, you will have noticed that the list of payment methods keeps growing: EFTs, credit cards, cash on delivery, eBucks … and now newcomers such as Payfast’s Payflex and PayJustNow.

Both of these are ”buy now, pay later” (BNPL) payment options offered by online retailers, and even some physical stores, to attract shoppers who are on tight budgets.

BNPL extends the period of payment over a few weeks or months without charging interest. Interest and /or penalties kick in only if you miss a payment.  Read more: What is buy now pay later?

The concept isn’t entirely new. Store accounts have been offering “six months to pay” interest free. 

The new BNPL products are less generous with the period of grace – most allow between six weeks and three months – and your credit arrangement is with the payment platform, not the store.

How to apply

If you want to use a BNPL provider, you apply at the checkout by registering your personal details, including your ID number, and providing the details of your credit card or debit card.

A “soft” credit check is conducted (this does not involve accessing your full credit report and therefore does not affect your credit score), and you can be approved in minutes. Read more: What is my credit report?

To qualify as a BNPL user, you need a certain minimum amount in your bank account, or available on your credit card.  If you pass the soft credit check, you are allocated a credit limit and are good to go.

The first instalment secures your purchase, so that your order goes through and delivery can take place in the usual way.  

The remaining two or three instalments are deducted from the credit card or bank account automatically on the dates specified when the purchase was made. The payment platform reminds you ahead of time that an instalment is due, so that you can make sure the funds are available.

How many BNPL payment schemes are there?

There are a few, but Payflex, launched in 2019, is considered the market leader. Then there is PayJustNow, Zeropay, and the latest addition, MoreTyme from online-only bank, TymeBank.

All four are available on certain websites and are partnered with certain products.

More BNPL options are expected in the near future and existing providers are working on expanding their availability.

Payflex CEO Paul Behrmann says the platform is looking beyond retailers, to other sectors like travel, medical and education.

Should you use BNPLs?

In theory, when used correctly, everyone wins with BNPLs: the platform provider, the retailer and the consumer. The platform provider earns a fee from the retailer for administrating the payment system; the retailer boosts sales and customer loyalty; and the consumer gets easier payment terms at no extra cost and very little inconvenience.

For you however, as a consumer, there is an element of risk – as there is with any form of credit.

Default penalties

If there is not enough money or credit available in your account or credit card when an instalment is due, you will be charged fees and/or interest.

Payflex’s website notes that: “There’s only one time you would ever pay more [than the normal price] …and that’s if you miss a scheduled payment. Then, sadly, we’ll have to charge a R75 (incl. VAT) default fee to cover our costs and a further R75.00 (incl. VAT) for every week the instalment is outstanding for a maximum of three charges. So, to avoid the drama, just make sure you have money in your account in advance of your scheduled instalment. We’ll email you in advance every time as a reminder.”

ZeroPay assures you “your payments will always have zero fees and zero interest, as long as you pay on time.” BUT … “if you miss a payment, you will be liable for the penalty/default fee of R125 (excl. VAT) for every payment you have missed, default interest on an overdue balance charged at a rate of 2% per month (calculated daily) and we may also decrease your spending limit.

PayJustNow charges R125 (incl. VAT) for a missed payment and R125 every time the payment is reprocessed (weekly), to a maximum penalty of 25% of the total price of the purchase. MoreTyme charges R65 for every missed payment.

Overextending yourself

In the thriving US BNPL market, market research company C&R Research found that 55% of BNPL users admitted to spending more when paying later, 57% said they had regretted buying an item because it was too expensive, and 56% had fallen behind on a payment, while 47% expected to do so again in the next 12 months.

The federal Consumer Financial Protection Bureau (CFPB) says there is nothing to stop consumers overextending themselves by opening more than one BNPL account.

It also highlights “habitual” usage, which can leave consumers out of pocket when it comes to paying other debts and financial obligations, and notes that regulation of this payment option is under review.

In Britain the boom in this form of credit has prompted regulation requiring BNPL providers to do proper credit checks to ensure consumers can afford these loans.

Martin Lewis, founder of Britain’s respected website MoneySavingExpert.com, says "buy now, pay later is often insidiously marketed as a simple payment option, or worse, a lifestyle choice. It’s not. It’s a debt, with all the dangers of debt”.

“It perverts purchasing decision-making, leaving many in a continuous loop of owe-owe-owe,” he says.

Impact on your credit record

Another risk factor is that payment defaults could be reported to the credit bureau and negatively affect your credit report. On the other hand, a good record of BNPL payments doesn’t have the opposite effect of enhancing your credit record, since payments that are made in full and on time are not reported to the credit bureau. Read more: Who is doing credit checks on me?

Handle with care

Used cautiously, BNLP payments give you a little more time to pay at no extra cost, so you can manage your budget. They are a bridge between paying on the spot and buying on credit. 

What you cannot afford to do is:

• Take a chance on having enough money for the second, third and fourth payments;
• Buy something you would not consider affordable without the BNPL facility; and
• Make a new purchase while you have instalments pending on a previous purchase.

Before you sign up, consider other ways of paying, says Erin White, a financial adviser with the Cape Town company Crue Invest.

“For example, if you pay your credit card in full every month, you could have up to 55 days interest free from the date of purchase of an item,” she says. “If your credit card is linked to a rewards programme, you would get that benefit too, as well as the protection a credit card provides if you don’t receive what you paid for.

“When BNPL is the only option for an immediate purchase, I remind clients to consider the opportunity cost of committing themselves to the payment arrangement for the next few months and how limiting it will be when they’re on a tight budget. A clear understanding of why you are using this facility, careful consideration of your monthly budget for the upcoming months and knowing what the default costs are should be weighed against the purchase.