Buy now, pay later, or BNPL for short, has emerged as a new payment option in the last several years. Traditionally known as ‘lay-by’, services like Afterpay and Zip sprang up in the middle of the 2010s, marketing themselves as the payment of choice for ‘modern’ customers.
But what is BNPL exactly, and can it affect your credit? As it turns out, BNPL might be worse for you than you thought. In this article, we’ll detail how buy now, pay later can impact your chances of approval for a personal loan and other credit products.
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This article was originally published in September 2022.
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Buy now, pay later (BNPL) is a payment option allowing customers to buy something immediately but pay for it in even instalments, usually four. Most major BNPL platforms require one upfront payment to start (often one-fourth) before scheduling the remaining payments.
The majority of BNPL platforms don’t charge interest or ongoing account fees, which distinguishes them from standard credit cards, which can charge interest rates in excess of 20% p.a.
Instead, BNPL tends to charge merchant fees (by charging retailers a small portion of each sale) and late payment fees for missed payments, commonly around $7 - $10 each time
So if you make all your repayments on time, most BNPL platforms technically won’t charge you anything. But the danger lies in those missed payments: Research from Curtin University shows that late fees are effectively high ‘quasi-interest rates’, and can even be higher than a comparable credit card.
Based on the average BNPL purchase of $151, a customer that either incurred late fees or account-keeping fees would pay an effective interest rate of 28.25% p.a. for Afterpay, which charges a $10 late fee and $7 for each subsequent missed payment.
According to Roy Morgan Research, more than four million Australians (19.1%) used a BNPL service at some point in the year to June 2022, and around 83% of Aussies are aware of them. Yet separate research from the Reserve Bank shows BNPL still accounts for less than 1% of all purchases. But 1% of billions is still a significant number.
Making up the majority of these customer purchases are the following key BNPL platforms:
How many Australians have used a buy now pay later service?
| Platform | % used at least once |
|---|---|
| None | 49.11% |
| Afterpay | 37.2% |
| PayPal Pay in 4 | 17.13% |
| Zip | 16.93% |
| Humm | 4.82% |
| Openpay (no longer available) | 4.23% |
| Klarna | 3.94% |
| Other | 2.66% |
| Bundll (owned by Humm) | 0.49% |
Some Aussie banks also have their own BNPL-style payment options, with popular ones being Commbank’s StepPay and NAB’s NAB Now Pay Later.
Mozo data shows that the average BNPL-utilising Aussie spends $2,208 annually, or $184 per month. But in terms of money still owed, either in outstanding instalments or overdue payments, NAB found the average outstanding BNPL debt as of December 2023 was $686.
While Gen Z is the biggest user of BNPL platforms compared to older age groups, millennials (Gen Y) carry the highest BNPL debts, NAB’s report shows an average BNPL debt of $824 for 30-49-year-olds, compared to just $538 for 18-29-year-olds.
Average BNPL debts by demographic:
| Demographic | Average outstanding balance (Debt) |
|---|---|
| 18-29 | $538 |
| 30-49 | $824 |
| 50-64 | $687 |
| 65+ | $553 |
| Men | $623 |
| Women | $740 |
| Lower-income | $681 |
| Higher-income | $749 |
In short, BNPL can affect your loan applications. But it's complicated in a more detailed way. Despite not technically being categorised as credit—not yet, anyway—most lenders still view it as such, and if you use BNPL to make transactions of any size, any responsible lender will consider this a debt.
Unlike other ‘bad debts and expenses’ like gambling, wage advances or payday loans, Jacaranda Finance won’t automatically reject your loan application if you reach a certain number of BNPL transactions. But every BNPL purchase in your financial statements can increase your debt-to-income ratio (DTI), which is essentially just your monthly debt payments divided by your gross monthly income.
According to Jacaranda Finance CEO Daniel Wessels, a higher DTI increases the chance of an unfavourable loan outcome.
“Your debt-income ratio is used to assess your ability to meet your repayments. Having more loans and debts to repay reduces the chances you can repay what you owe,” Mr Wessels said.
“Each lender has its own guidelines, but a general cutoff point for personal or car loans is a DTI of 70%. That can include the common forms of debt, like mortgages, credit card repayments and other personal loans, but we include BNPL in that as well.
“If the amount you’re paying towards BNPL services overcommits you and we can't fit a loan into your budget, you won't be approved.”
On 12 March 2024, the Federal Government released draft BNPL regulations that will make BNPL subject to the same consumer protection laws as banks and other lenders.
“Under the proposed reforms, BNPL providers will be required to hold an Australian Credit Licence. They will have to comply with existing requirements under the Credit Act, including in relation to product disclosure, dispute resolution and hardship assistance,” Assistant Treasurer Stephen Jones said.
“BNPL providers will also be required to take steps to make sure they are lending responsibly. This requirement will operate in a way that is flexible, adaptable and proportionate to the risk of consumer harm.”
This means that, depending on when you read this, the current information in this section about the potential credit impacts of BNPL could be outdated.
Up-to-date information can be found on the Treasury website.
An ASIC review in 2020 found that 21% of users missed a payment in a 12-month period, with nearly half of those (45%) getting stung with multiple late fees. Missing a payment and defaulting on the debt entirely can result in a hard enquiry on your credit report.
Try to cut down on any existing BNPL debts a few months before applying for a personal loan.
See also: How to Improve Your Credit Score.
You can still get a personal loan, car loan or credit card if you use BNPL. Like everything, moderation is key. Trying the following can help you use it responsibly and avoid any fallout:
Each lender will have its own guidelines on how it assesses things like buy now, pay later, but as a general rule, doing the following is likely to boost your chances of being approved for a loan:
Of course, you can improve your chances of loan approval by minimising your use of buy now, pay later services, payday loans, wage advances, and gambling.
Personal loans tend to be more suited to larger expenses paid off over a longer time frame, such as buying a car, paying for renovations, weddings, holidays, you name it! Jacaranda’s Personal Loans come with loan terms between 25 months and 36 months, with available loan amounts between $3,000 and $25,000.
Buy now, pay later, on the other hand, could be a suitable option for purchases on one-off expenses that fall below the usual threshold for a personal loan, like laptops and nicer clothes.
As with all forms of personal borrowing, the right option for you completely depends on the situation you are in. You can read our article below comparing personal loans and BNPL to see the pros and cons of each.
At Jacaranda Finance, you can check if you qualify for a personal loan without affecting your credit score. If we reject your application, we won’t make a hard enquiry on your credit report, so your score will remain unchanged - no harm done!
To get started, simply submit an application through our 100% online application process in as little as 5-12 minutes1. Our process is one of the quickest in the business, with most applicants hearing back from us on the same day after submitting an application.2
Estimate your loan repayments with our calculator below and get started on an application if you’re ready!
$3,000 - $25,000
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