How BNPL and Afterpay Can Affect Your Chances of Getting a Loan

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.

On this page: 

• What is BNPL?
• What are the major BNPL platforms?
• BNPL statistics
• Will BNPL affect your loan application?
• Will BNPL impact your credit?
• How to use BNPL responsibly
• Tips to get your loan application approved

This article was originally published in September 2022.

What is BNPL? 

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.

What are the biggest BNPL platforms?

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?

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.

BNPL statistics: What’s the average BNPL debt?

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:

Will BNPL affect your loan application?

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.”

Update: BNPL to be regulated like credit products

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.

Missed repayments can hurt your credit score

While using buy now, pay later platforms occasionally and paying on time every time can only have indirect effects on your credit, missing repayments and being charged a late fee can directly lower your credit score. 

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.

How to use BNPL responsibly

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:

• Don’t use it for everyday expenses: while non-essentials like clothing (28%) and electronics (16%) are among the most common purchases, too many people use BNPL for essentials like food (9%) and bills/utilities (6%). The more you buy, the more you owe.
• Stick to one at a time: there are quite a few BNPL platforms available in 2024. Despite there being so many, they all mostly do the same thing, so just use the one and only one if you can.
• Link your account to your debit card: Credit card users (66% - 73%) are much more likely to miss repayments and suffer extra consequences than those who link their account to a debit card. Set up automatic direct debits to your everyday bank account, as paying your debts with a credit card is just swapping one debt for another. 
• Don’t splurge: Only buy what you need or the occasional treat. Many BNPL companies offer incentives and discounts with certain brands, but this could be a huge expense if you get sucked in.
• Budget accordingly: If you don’t already have a budget, make one and factor your debts into it! Make reminders of when your repayments are due to be sure you have enough money in your linked account.

Tips to get your loan application approved

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:

• Increase your savings: Having a good amount of regular contributions to your savings account is a positive sign for a lender. Adding extra money regularly can help you get approved.
• Pay off other debts: Other high-interest debts, like credit cards, can lessen your chance of approval, especially if you’re struggling to repay them. The more debts you have, the higher your debt-to-income ratio and the higher your chances of rejection. Consider consolidating your debts to make paying them off a bit more manageable. 
• Check your borrowing power: Estimate your borrowing power online before you apply with a borrowing power calculator, such as ASIC’s. Being honest with your expenses and income can give you a more accurate estimation of what you can afford and could stop you from applying for an unrealistic loan.
• Maintain consistent income: Whether you’re employed full-time, part-time, or self-employed, try to maintain at least one year of consistent income from your work before you apply. This demonstrates to the lender that you have a steady stream of money to pay off your loan. Job-hopping too much could lower your chances of approval, at least in the short term.

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.

BNPL vs Personal Loans

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 9 months and 48 months, with available loan amounts between $2,100 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.

Written by - William Jolly

Content Manager

William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.

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