The dangers of buy now, pay later schemes

'Buy now, pay later' - it sounds too good to be true.

The schemes are often marketed like layby - but there's a twist. At some retailers, people can use a buy now, pay later service to pay between 20 and 25 percent of an item, take the goods home straight away, and pay the rest off in a small number of regular instalments.

But unlike other credit providers, buy now, pay later schemes aren't regulated. Consumer Action Law Centre chief executive Gerard Brody said that means they don't have to have responsible lending standards.

And if payments aren't managed wisely, customers risk incurring late payment penalties and potential impact on their credit score.

"That means they're not required to assess whether the loan is suitable for you and whether the repayments are affordable," Brody told The Project.

Fincap consumer issues adviser Jake Lilley said often people are coming to their service with more than 10 loans at any one time.

"It's a real recipe for a debt spiral - especially when those late payment fees start to kick in." 

Consumer NZ chief executive Jon Duffy said while the schemes can be advantageous for some people, they can lead to a world of trouble for others.

"The buy now, pay later company relies on a certain percentage of people defaulting - at which time they get slapped with penalty fees."

Buy now, pay later has avoided being regulated like loans because the fees are paid by the retailers, not the consumers. But operators of the schemes say there are important differences.

Afterpay, for example, doesn't allow further purchases when payments are missed, senior director Michael Saadat told The Project.

"We make sure our late fees are low and capped which is resulting in consumers paying fewer and fewer late fees."