Buy now, pay later: Beware the modern-day layby

Buy now, pay later - beware the modern-day layby
Photo credit: Getty

'Buy now, pay later at no extra cost'. It's the modern-day layby... with a twist.  

The layby of 10 years ago held goods out the back until they were paid off. Today's 'Laybuy' allows them to be taken now with a portion paid upfront and the balance over six or eight weekly instalments.

A checkout convenience that's available everywhere, including Trade Me, Glassons and The Warehouse, buy now, pay later schemes such as Afterpay, Affirm, GenoaPay and Laybuy are gaining traction as another reason for customers to spend today.

Pejman Okhovat, chief executive of The Warehouse, confirmed that PartPay is popular with their customers, and given the short pay-back period and payment reminders, customer default rates are low. 

"We are always looking to introduce new innovations that make shopping with us easier and allow customers to shop in the way that suits them best.  

"PartPay was initially introduced as online-only, and it was so popular we've now rolled it out to our physical stores as well."

Alison Morris, vice president commercial at Worldpay, said the concept of 'buy now, pay later' has been part of commerce for generations.

"In New Zealand, buy now, pay later services are gaining widespread popularity for removing common barriers at the critical moment of purchase decision.

"[These] options help reduce price friction and provide access to goods that some consumers would otherwise forgo due to personal financial limitations."

Although convenience is important, if payments aren't managed wisely, customers risk incurring late payment penalties and potential impact on their credit score, and the temptation to over-commit.   

Ayesha Scott, senior lecturer of finance at Auckland University of Technology said buy now, pay later services can be advantageous; however with convenience the primary focus, given the potential impact on credit rating and exposure to fees, they're not designed to be used in a smart way.

"The fine print in buy now, pay later services doesn't guarantee that credit information will be passed on, but the [service] retains the right to do so," Scott explained.

Additionally, if you're late or miss a payment, you're going to pay a fee.    

"This is not always proportional to the amount of the purchase made," Scott warned.

"People need to be really mindful when using [buy now, pay later] services. Good financial decision-making remains important regardless of the total up-front cost.

"Using pay-later makes it easier to over-commit and spend more than you should have by spreading payments out."

Okhovat confirmed The Warehouse's PartPay scheme applies an $8 fee for missed payments, capped at $40.

According to Morris, one of the reasons people use these payment schemes is to manage disposable income, such as buying Christmas gifts.

"Students, travellers and people who have irregular work, [such as] contractors and casual workers find 'buy now, pay later' beneficial as they don't have a steady flow of income to pay large upfront costs," Morris explained.

If multiple buy now, pay later services are used across different retailers, it's currently unclear whether there are controls in place to prevent over-committing.  

"['Buy now, pay later'] makes instant gratification easier. It teaches that if you can't afford something this week, you can still have it," Scott said.

Irrespective of how goods are paid for, it's important to pay attention to the cost of each item and to immediately factor it into the budget.

Morris confirmed that globally, use of alternative payment methods is growing and that Millennials are ahead of their more senior peers.

"[Worldpay] data shows that 28 percent of Millennials globally have used a mobile wallet at the point of sale, including 74 percent of Millennials in China and 75 percent in India.

"In New Zealand, mobile wallets made up 19 percent of total e-commerce spend in 2017, [indicating] that Kiwi shoppers remain more hesitant to embrace emerging payment technologies.

"Emerging and alternative payment methods are [becoming] increasingly appealing to consumers due to their ease-of-use coupled with unrivalled convenience and security."

There's no doubt that buy now, pay later services are here to stay and provide a convenient way to shop.

In circumstances where goods need to be purchased regardless of how they're paid for, using a buy now, pay later option could be faster and cost less than using an alternative line of credit.

However, in a society where it's becoming easier to purchase with less thought about where the money is coming from, convenience needs to be weighed up against the practicalities of comparing prices, spending within budget and ability to repay within the agreed timeframe.

Just because it's convenient, doesn't mean it's good for you.