Shoppers love the BNPL option. But is it more dangerous than credit?
Without affordability checks, there’s the risk of becoming over-indebted.
Despite overall spending decline, consumers are increasingly adopting Buy Now Pay Later (BNPL) methods for purchases, according to Stats SA.
PayJustNow, a local BNPL provider, witnessed more than double the Gross Merchandise Value growth in 2023 compared to 2022.
Rather than making an upfront payment, BNPL allows consumers to divide the cost into equal instalments, generally over a six- to eight-week period, interest-free.
This is to make large purchases easier to pay off.
For numerous South Africans, this practice has proven invaluable in averting the need to purchase certain essential items that are challenging to afford outright. Instead, they can spread the cost across two paychecks.
While it may appear to be a lifesaver, this convenience comes with potential risks, and shoppers could find themselves in trouble if they fail to adopt responsible shopping habits.
No credit checks
Most BNPL sites don’t really do background credit checks before they allow shoppers to sign up. It is generally as easy to open a BNPL account as it is a social media account. You pretty much just need to add your debit card to it, an email and a password.
Credit checks are crucial as they help merchants understand how much a shopper can afford and also inform the shopper about their spending limit.
Without these, there is the risk that shoppers may make too many purchases and overcommit.
Alex Forsyth-Thompson, CEO of fintech Float, warns: “With high living costs and interest rates, South Africans need to avoid any new credit issued without the usual affordability checks. The fact that BNPL loans don’t reflect in credit records is a concern that is compounded by how easy it is to accumulate multiple BNPL purchases. Small payments can add up quickly and this could end badly. What starts as a smart decision to spread out payments can quickly evolve into a financial burden.”
Late payment fees
All BNPL providers impose heavy penalties for late payers. According to Float, late payment fees can be as high as 25% of the purchase within a few weeks.
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The imposition of heavy late fees increases the risk of shoppers falling into a debt spiral. If someone is unable to make a payment on time and incurs significant fees, it becomes harder for them to recover and fulfill subsequent payments, leading to a cycle of accumulating debt.
And if the BNPL providers report late payments to credit bureaus, it can affect the shopper’s ability to access credit in the future and may result in higher interest rates on loans and credit cards.
So how can shoppers ensure they use BNPL responsibly?
Budget mindfully. Ensure that you have a clear understanding of your financial situation and that you can comfortably meet the repayment obligations.
Fintech company Float asks customers be realistic about their ability to repay their purchase in the time frame they’ve selected. “Remember six weeks only gives you access to one additional salary cycle,” the company advises.
Shoppers are also told to stick to one BNPL account instead of multiple plans from different providers. It’s easy to lose track of what is due when and how much you have actually spent. It can add up to more than you thought.