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Buy now, pay later: The modern debt trap

Most people use BNPL services such as Afterpay and Zip with few issues, but for some the easy access to credit can lead to financial distress.

person checking bills and their finances
Last updated: 15 June 2021


Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • Financial counsellors say the number of vulnerable customers getting into financial difficulty with BNPL is on the rise  
  • Many customers have multiple BNPL accounts
  • Some customers are using payday loans to cover BNPL debts 

For Leash Sullivan, a 34-year-old single mother who lives in the suburbs of Adelaide, the last year has been tough. She works in hospitality and events and saw her hours greatly reduced during the coronavirus pandemic, which meant she increasingly had to rely on government support payments through JobSeeker.

She considers herself lucky that, as the rate of the coronavirus support payment was cut back in March this year, her work hours picked up again slightly.

"It's still a strain, these jobs aren't high-paying jobs. Even though I am getting this extra money from work, it doesn't stretch too far at the end of the day," she tells CHOICE.

When a particularly high electricity bill comes in, or when she needs a new vacuum cleaner or a fridge, Leash turns to buy now, pay later (BNPL) services to avoid paying it all at once.

"You get all these bits and pieces and it just adds up at the end of the day and you don't realise … it adds up and leaves you a little bit short," she says.

When the BNPL debts come in later in the month, Leash says she sometimes skips out on essentials to make the repayments.

"I'll just buy less food for myself. I have a son so I make sure he is fed, but I'll just cut out on meals and stuff for me. I always make sure he has his meals," Leash adds.

Australians in financial distress

Leash's experience is far from unique. Financial Counselling Australia CEO Fiona Guthrie says while calls for financial assistance through the National Debt Helpline dropped off last year thanks to high levels of government support, they are back on the rise again now that much of the support has been withdrawn.

"It's a bit like a U, so we've got to the bottom of the U and the calls are going back up to where they were. Face to face services – about half of them – are reporting demand at the same level as before the pandemic," says Guthrie.

CHOICE spoke to three financial counsellors who work on the frontline and they say financial products like BNPL are increasingly being used to plug the gaps for vulnerable people who are struggling to make ends meet.

Nine out of ten customers might use BNPL effectively ... but then there is that one person you see who is in real trouble

Zack Wildy, financial counsellor

Zack Wildy is a financial counsellor at the Indigenous Consumer Assistance Network based in Cairns. He says a third of all clients he sees have at least one BNPL debt. Many have multiple BNPL accounts.

"In terms of vulnerable people, we are seeing BNPL used by people who are under pretty severe financial hardship, because there are no credit checks or the credit checks they do are pretty lax," Wildy says.

"Nine out of ten customers might use BNPL effectively and healthily, but then there is that one person you see who is in real trouble," Wildy says.

"I can see how the public might think this is pretty benign, but I guess for the people who are vulnerable when they can access this almost no-strings-attached line of credit, that can have very serious impacts down the track," he added.

closeup of hands holding several fifty dollar bills

A booming market

BNPL providers, the biggest in the Australian market being Afterpay, Zip and Humm, have been around for years offering customers "interest free" finance to shop now and pay the money back in instalments later.

Their growth in the marketplace has exploded in recent times. The most recent ASIC report into BNPL providers in November 2020 showed the total value of transactions increased by 79%, from $3.1 billion in the 2017–18 financial year to a whopping $5.6 billion in the 2018–19 financial year.

Transaction values in the second half of 2020 grew by more than 50% for some major BNPL providers compared to a year earlier.

Market leader Afterpay's annual income in their half-yearly 2021 report was $374 million, up 108% on the previous year. In August 2020 they reported 103% growth on the previous year. 

Zip promotes their ability to be used anywhere that accepts a Visa contactless payment with flashy ads featuring young tennis player Nick Kyrgios alongside social media influencers.

Dr Billy Sung, associate professor at the School of Marketing at Curtin Business School, says the ads for BNPL providers target young people who have become wary of credit cards.

The ads for BNPL providers target young people who have become wary of credit cards

"You can have the immediate gratification without paying more later, and obviously that is a very strong unique selling proposition that really attracts people that might have less disposable income, or provide people with the financial flexibility they might not otherwise have," he says.

BNPL providers sell themselves as a budgeting tool and not as a way to make ends meet for vulnerable people. But a nationally representative survey conducted in September 2020 by CHOICE suggests they are not being used as a budgeting tool by many Australians. 

It found a little over one in ten Australians (12% of respondents) had used a BNPL service in recent months to cover a cash shortfall until payday.

closeup of smartphone with message for loan approval

The risks of BNPL

Despite not charging interest like traditional forms of credit – such as credit cards or high interest payday loans – the model of BNPL providers isn't without its risks.

The "paying better" interest free model of market leader Afterpay can quickly turn into relatively high levels of interest-equivalent fees if you miss a scheduled repayment. 

For example, a single $10 missed payment fee charged by Afterpay on a $50 purchase is equivalent to a 20% interest rate. That late fee goes up by $7 if the amount remains unpaid for seven days after the due date, however late fees are capped at 25% of the original purchase price.

According to the 2020 ASIC report, one in five BNPL customers surveyed had missed a repayment in the last 12 months, with 47% of those being 18–29 years old.

In the second half of 2020, Afterpay reported their total income from late fees was $35.1 million ... showing collecting from customers who struggle to make repayments is still part of their business model

ASIC also found 20% of consumers like Leash missed out on essentials such as meals in the last 12 months in order to make their BNPL repayments, and 15% of consumers surveyed said they had taken out an additional loan.

Afterpay made less than 9% of their income from late fees in 2021, down from 20% just a few years earlier. But while the percentage might have dropped, the amounts are still going up. 

In the second half of 2020, Afterpay reported their total income from late fees was $35.1 million, compared to $32.6 million for the six months just prior, showing collecting from customers who struggle to make repayments is still part of their business model.

The Consumer Policy Research Centre tracked the finances of young people throughout 2020 and found that in May, just 2% of young people sought payment assistance or missed a payment for a BNPL, credit card or personal loan. But by July, 12% reported seeking payment assistance, and the proportion missing payment reached 8%, rising further to 10% in August.

Wildy says that the majority of customers with multiple BNPL debts who seek financial assistance with him also have credit cards or high interest payday loans of similar amounts, raising the concern that people are using worse forms of credit to pay off BNPL debts.

On the cusp of losing everything

Jenny* lives in a small town around three hours outside of Brisbane and is one of those people who has turned to extremely high interest payday loans to meet her BNPL instalments.

At one point she says all her purchases with BNPL providers added up to around $700 a fortnight and she took out payday loans on several occasions to meet the repayments.

She says she doesn't see BNPL as the main concern, but the quick and easy accessibility of payday loans as the main cause of her financial distress.

I think they're too easy to get ... I can't keep up with all the payments


"I think they're too easy to get. I have no idea how I could have between five and six consecutive payday loans all at the same time. One of the reasons I've gone to a financial counsellor is I can't continue to pay these ... I'm behind on my mortgage, I might lose the house because I can't keep up with all the payments," she says.

Despite working and having a steady income she says payday loans in particular have threatened everything.

"I've been employed for 12 years, bought a house, had a nice car – heaps of things. Now I'm on the cusp of losing everything," she says.

Financial hardship

A July 2020 joint report from Financial Counselling Australia and State and Territory financial counselling associations, reissued in August 2020, highlights how the hardship policies of BNPL providers fall well below the standard of traditional non-fintech lending providers.

They asked financial counsellors to rank the financial hardship policies of major bank and non-bank lenders on a scale of one to ten, with all of the big four banks performing better than all of the BNPL providers.

Even the best ranked BNPL provider, Afterpay (with a score of 4.8 out of ten), performed worse than almost all rated debt collection agencies on how accommodating their policies were for people in financial hardship.

BNPL providers don't have to comply with the National Credit Code and the responsible lending regulations and financial hardship policies that come with it

Julia Davis, senior policy officer at the Financial Rights Legal Centre, says they recently conducted a desktop audit of BNPL providers' financial hardship contact details and found in some instances the customer had to make more than seven clicks on their webpage before finding hardship information.

Some providers had no hardship information available on their website at all.

"As people who have worked in the debt space for decades, we see a lot of red flags. These companies are absolutely encouraging people to spend money they don't have. It's a bit of a debt trap," says Davis.

"You end up spending money you don't have and your pay day comes around and you end up spending most of your money on these (repayments) and so you don't have money and you end up taking out more contracts," she said.

Industry responds

Because BNPL providers don't charge interest, they sit in a regulatory loophole where they don't have to comply with the National Credit Code and the responsible lending regulations and financial hardship policies that come with it.

The industry is subject to ASIC's product intervention powers and the ACCC has previously written to merchants about concerns of surcharging on BNPL transactions. 

The Australian Financial Industry Association (AFIA) – the industry lobby group representing major players in the BNPL market – says their recently released voluntary code of conduct will ensure best practice for consumers when it comes to responsible lending and financial hardship.

The code requires BNPL providers to be proactive in offering hardship assistance for customers experiencing financial difficulty

AFIA spokesperson

"The code requires BNPL providers to be proactive in offering hardship assistance for customers experiencing financial difficulty," an AFIA spokesperson told CHOICE.

They said that less than one percent of BNPL customers had requested financial hardship assistance from their BNPL provider, even at the height of the pandemic.

"The code sets best practice standards for the sector and strengthens protections for customers, while preserving customer choice to make purchases and payments in a way that suits their needs and preferences," the spokesperson said.

*Name changed. 

BNPL investigation series

This is part one in our investigation into buy now, pay later services.

If you need help tackling your debt, call the National Debt Helpline on 1800 007 007 for free, confidential and independent information and advice.

Correction 21/06/2021: This article was amended to make note that Afterpay's late fees are capped at 25% of the original purchase price.

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Stock images: Getty, unless otherwise stated.