Christmas, the summer holidays and now 'back to school' align for some potential buy-now-pay-later pitfalls

When used in moderation, Buy Now Pay Later (BNPL) can smooth out the spikes in your budget for essential purchases, by spreading them out across around four interest-free payments.

However, if you're living purely for your hedonistic ways or simply racking up multiple instances of BNPL debt and not keeping track of your payment schedules, you could be in for a rough ride.

The summer months are primetime for taking out BNPL debt.

"It's the Bermuda triangle of personal finance' said Tom Hartmann, Personal Finance Lead at Te Ara Ahunga Ora (The Retirement Commission), pointing to the perfect storm of Christmas, the holidays and back to school. Te Ara Ahunga Ora runs sorted.org

BNPL services allow consumers to purchase and obtain goods and services in-store or online immediately, but pay through installments over time. While there are no interest charges, there are penalty fees for late payments. BNPL service providers are currently free from consumer protection measures other debt providers face. However, the Government is considering applying consumer credit contracts law to the sector.

For financially stressed families who just scraped by in December, back to school costs in late January could see them turning to BNPL in the absence of, or lack of knowledge about, other options.

In December, Te Ara Ahunga, partnered with financial support support agencies Ngā Tāngata Microfinance, Good Shepherd NZ, Christians Against Poverty (CAP) and FinCap to promote safe spending in the lead-up to Christmas.

The partner institutes primarily offer debt relief loans, debt coaching and advocacy at the coalface, to help individuals regain financial stability in a way that considers their unique circumstances.

BNPL was a key focus of the campaign, which pointed out that Covid-19 had added to the financial challenges for many in late 2021.

Hartmann said tales of people having up to 13 BNPL loans on the go at once were a worrying trend and in many cases it had not come about through overdoing the 'nice-to-have' purchases.

"People are using BNPL for everyday needs. If it's a choice between feeding your family or going into debt and sorting it out later, you’re gong to feed your family."

He said BNPL was useful for "consumption smoothing" when you don't have the money up front for larger items and can take advantage of interest free borrowing within a very specific timeline.

This was in contrast to credit cards which can keep you in debt for longer periods of time, especially if you're only making the minimum repayment.

Of course, this 'sensible' approach assumes timely payments to dodge late fees and resisting the offers of extending credit or consolidating BNPL purchases into longer term agreements that often carry establishment fees and other charges.

Only 18% of online users surveyed by sorted.org actually consider BNPL to be a debt, revealing a disconnect in its perception by consumers. 

"A lot of times they consider it layby but they don’t realise what they're doing is making one payment upfront but you’re getting a company to pay all the rest of the payments. You are borrowing from a finance company," said Hartmann.

In fact, it is a line of credit that often has a 'credit limit' of $1000 to $1500 per agreement - it's easy for the amount to get up there over three or four sign-ups.

This type of debt also counts in home loan applications, and in extreme cases could derail them, with lenders assuming an individual has utilised their full credit limit, in the same way they consider standard credit cards, because they have the potential to rack it up at any time.

Another often-overlooked danger is the potential to be upsold.

The nature of BNPL makes purchases, even of larger amounts, seem accessible and may allow consumers to ignore a natural 'double-take' before parting with large chunks of change.

"If you’re at a retailer, buying something that’s $200 and you put down $50, the pain that you experience in that moment is only letting go of $50 but your overall commitment is $200," said Hartmann.

From here, it's easy to add another item or two and get to totals of $400 or $600, because even the increased initial outlay still seems quite manageable in the moment and by nature, the apps are set up to make approvals seamless.

BNPL can also become complicated when multiple loans are taken out on different weeks and it becomes hard to stay on top of staggered payment dates and, more importantly, what the total level of debt is adding up to.

Te Ara Ahunga Ora recommended keeping a close eye on BNPL agreements throughout their lifecycle, which could include setting phone reminders to ensure due dates are not missed.

You can see details on all New Zealand's BNPL service providers here.