How to use buy now pay later loans like Afterpay or Zip

How buy now pay later works

Buy now pay later options like Afterpay or Zip are popular with both shoppers and retailers. They’re widely available when shopping online or instore. Here’s how they work:

• When you buy something, you pay a small part and the BNPL company pays the rest.
• You receive the item straight away.
• You pay the BNPL company back in instalments – typically in four payments each fortnight.

For example, you might want to buy a $200 pair of trainers in a shop that offers Afterpay. You download the app, enter your details, and are approved. You pay $50 up front, take your trainers home, then make three fortnightly repayments of $50 each.

If you miss a repayment because you don’t have enough funds in your bank account when Afterpay goes to deduct each $50, you are charged an initial late fee of $10 and a further $7 if the payment remains unpaid 7 days after the due date.

BNPL is a type of debt. It’s a way of borrowing without interest or fees (the retailer covers these costs) but having too many at once can be hard to keep track of and tricky to handle. And if you miss repayments, you’ll be charged late fees.

Buy now pay later is interest-free, but it is debt

Going into debt is always a bit risky, since our circumstances might change and it becomes difficult to repay. Sometimes it’s hard to tell what might happen.

The aim is to avoid all late fees, otherwise we end up paying more for something than we intended to. These penalties do add up, as high as the following dollar amounts for each purchase:

• Zip's late fee cap is $40.
• Afterpay's late fee cap is $68.

If you have too many of these at the same time, you may find yourself sacrificing too much of your life in order just to meet all your repayments – which is stressful!

The other catch with buy now pay later options is that we can get “upsold” on buying more than we planned to.

For example, buying those $200 shoes and only having to pay $50 at first, it can feel like we can afford to spend more. Buying another $200 item with the same upfront $50 payment, for example, means that we’ve actually spent $400 in the end. Buying a third thing feels like we’re just spending $150 at the time, but we’ve just committed to paying $600.