Beware the buy now, pay later ‘debt spiral’. Experts warn it’ll be haunting us long after Christmas

 In Home News Section, Uncategorized

Are you using buy now, pay later (BNPL) services to buy your Christmas gifts this year?

You could be in a for a bad debt hangover, financial counsellors warn.

In its annual survey, Financial Counselling Australia (FCA) found a sharp increase in people with bad BNPL debt seeking help from financial counsellors in the past 12 months.

Some of the more popular BNPL companies include Afterpay, Zip Pay, Latitude and Sezzle.

Eighty-four per cent of financial counsellors said that about half, most or all clients had BNPL debt at the time of the survey.

That’s compared to 31 per cent just a year ago.

And 61 per cent of those surveyed said most or all clients with BNPL debt were struggling to pay other living expenses.

“We’re hearing from people who have up to nine different buy now, pay later products across a number of different companies. And it’s just getting unaffordable for them to pay,” says Deb Shroot, a financial counsellor with the National Debt Helpline.

“Usually, these products are also on top of a credit card, personal loan, maybe a couple of utility bills or rent.

“It’s just putting people into a debt spiral.”

Meet Jackie, who needed to fix her teeth

Jackie first started using buy now, pay later to pay for things like good quality bed linen and presents for others.

The disability pensioner missed a couple of payments and was hit with $18 late fees.

But it was a trip to the dental clinic – which offered BNPL as a payment option — that landed her in serious financial trouble.

“The private dentist said to me, ‘You need a couple of crowns and you need a plate or basically you’re not going to have any teeth,’ and they gave me a quote for $4,200,” she says.

When Jackie said she could not afford the dental bill, she was told the dental clinic offered BNPL as a payment option with a company she had an account with.

Although she had initially been asked to provide a Centrelink income statement when she signed up with the BNPL company, she was able to increase her spend limit without any further checks.

A slippery slope

Jackie soon realised she could not afford the repayments and over about six months she racked up around $2,500 in late fees.

“I just clicked on the app and the money was there. You’re stuck with the repayment plan,” she says now.

“At one stage, they [the BNPL plan] took the money out and I didn’t have money for food.”

Buy now, pay later products are increasingly being used to pay for everyday items such as groceries, medical and vet bills — or simply buying a beer at the pub.

These days, you can even use BNPL to pay for large recurring expenses like childcare.

And anyone can rack up a bill. It can be devastating for those who haven’t got the capacity to juggle the debts with everything else going on in their lives.

“Essentially, you’re having people who are drunk and cognitively impaired, able to take out a credit purchase and make a credit decision,” says Deb Shroot.

So, what help is out there?

If people are struggling, they’re supposed to be able to access a hardship program so they can work out a new payment plan.

However, FCA’s survey found BNPL hardship practices were falling short.

Financial counsellors ranked Humm’s hardship practice the worst, at 4.7 out of 10. Zip scored 5.5 and LatitudePay got 5.2.

Meanwhile, Afterpay’s hardship program was ranked the best, but it still only scored 5.9 out of 10.

In comparison, the major banks score about 7 out of 10 in FCA surveys.

Jackie agrees that BNPL hardship policies need to be improved.

Although her repayments were switched from weekly to fortnightly, when she needed to make further changes she says the company did not respond to her phone calls or emails.

It was not until she got help from a financial counsellor through the National Debt Helpline that her debt was put on hold for three months while her complaint was reviewed.

“It’s not like I don’t want to pay it, I just need to pay it as I can and in smaller sums because otherwise I won’t have anything. I am looking around for things to sell so I can pay a debt. It’s really hard, it’s embarrassing,” she says.

BNPL ‘out of control’

A whopping 95 per cent of financial counsellors say BNPL needs to be regulated to protect consumers, and should be covered by the National Credit Code (NCC).

Deb says BNPL services charge fees instead of interest and so are not regulated by the NCC, which covers credit cards, mortgages, personal loans, payday loans and consumer leases.

Instead, BNPL providers Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co are signatories of a voluntary industry code of practice.

“For this reason if things go wrong, you’re at the mercy of the company, there is no recourse for correction, there is no ombudsman to complain to, you just simply don’t have the same protections that you would have when using the other products,” Deb says.

Fiona Guthrie, CEO of Financial Counselling Australia, says Australia needs to conduct a specific and independent review of the law and develop fit-for-purpose regulation under the National Credit Code.

“We need to have safeguards around this product, too many people are being harmed,” Fiona says.

“Because when you think about it, you can get by now, pay later from just a couple of hundred dollars all the way up to $30,000. And on expenses from shoes to fashion to solar panels, it’s just out of control.”

Buy now, pay later defends hardship programs

Zip Co says it does credit checks on every customer, and 1 per cent of them have missed payments. It has 500 customers on its hardship programs from 2.6 million customers.

Humm says 1 per cent of its customers applied for financial hardship support and the company makes it easy to apply for them to apply for help.

“Our credit-decisioning algorithm ensures that we only accept customers who can repay their accounts, but we understand that circumstances can change,” it said in a statement.

Afterpay says 96 per cent of payments on its platform are made on time, and customers are suspended from the service if they make a late payment.

Christmas concerns

Household debt levels typically surge in the first quarter of the year after people overextend themselves in the Christmas period.

Credit card use is declining, with many people turning to BNPL services instead.

Jackie has a warning for people considering using buy now, pay later services to buy Christmas presents they cannot otherwise afford.

“Just don’t. You might look at it like it is just a small repayment, especially if you’ve got multiple ones. But after Christmas, you’re going to be in so much debt and under so much stress,” she says.

“I think they [BNPL companies] are sort of targeting vulnerable people, and coming up to Christmas people are going to be looking at options to buy for Christmas.”

For Jackie, her BNPL debt is like a black cloud hanging over her.

“Every day you get up and think, you can’t even afford a cup of coffee. It’s really, really hard.”

By business reporter Rhiana Whitson (Original ABC Article)