Western Australia’s office for Consumer Protection is advising caution for Christmas shoppers, given the wider availability of credit options – including ‘buy now, pay later’ schemes and payday loans – which could leave consumers drowning in debt.
The Covid-19 pandemic has seen increasing use of ‘buy now, pay later’ schemes which allow shoppers to take possession of the goods straight away, while paying off the purchase price in instalments, the organisation has warned.
At the height of the pandemic, prominent ‘buy now, pay later’ business Afterpay picked-up one million new users, with around $2-billion spent by consumers on buying goods and services in the June quarter alone.
Think twice about ‘buy now, pay later’
While Afterpay is the most dominant force in the market, its rivals include a growing number of similar platforms such as ZipPay, BrightePay, Payright and Openpay.
Commissioner for Consumer Protection in WA, Lanie Chopping, warns that consumers should think twice when considering using ‘buy now, pay later’ options.
“The key advice from the financial regulator, the Australian Securities and Investment Commission (ASIC), is to check the terms and conditions before you sign up to any scheme.
Many fees may be applicable to loans
They are often promoted as interest-free. But there are late fees, account-keeping fees or payment-processing fees that may apply,” Chopping said.
“For example, while you may make a purchase for $100, one late payment could cost you up to a further $17, plus any potential bank fee for a payment default.
“A review by ASIC in 2018 found that one in six ‘buy now, pay later’ users had become overdrawn, delayed bill payments or borrowed additional money. Most consumers reported that the option allowed them to buy more expensive items and generally spend more than they would normally.”
Payday loans charge big establishment fees
Chopping said consumers wanting quick cash for Christmas spending may also be tempted to get a small amount loan, or payday loan, which allows them to borrow up to $2,000. But this can end up being more costly in the long-term.
“Lenders can’t charge interest on payday loans, but they can charge a lot in fees,” she explained.
“Most payday lenders charge an establishment fee of 20% of the amount borrowed and a monthly service fee of 4% of the amount borrowed. For a $2,000 loan, that’s a $400 establishment fee and $80 per month for the service fee.”