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The Afterpay trap: How to escape buy now, pay later debt

Fast growing payment service Afterpay can lure people into debts they can’t afford. Find out how it works and how to escape the ‘buy now, pay later’ trap.

Life doesn’t wait—Afterpay it!

Joanne* had a long list of bills to talk about. They were weighing her down financially and emotionally. She came to a free budgeting appointment hoping we could help her get them under control. (*Not her real name.)

The list included 23 Afterpay charges. Joanne’s Afterpays were about as wide-ranging as the 40,000+ Australian merchants who offer Afterpay as a payment option. The least expensive was for a bunch of flowers, while the most expensive was for an airline ticket. 

How does it work? Afterpay works like a layby, with the key difference that you get to enjoy your purchase immediately. Other similar services include ZipPay, Certegy Ezi-Pay, Oxipay, BrightePay and Openpay.

Approval for the service is instant. All you need is an active debit or credit card from which your repayments can be made in four equal instalments, each two weeks apart. 

Unlike credit cards or store charge cards, there’s no interest to pay on purchases. Rather, Afterpay makes money by charging merchants around 5% of the transaction, while customers are charged late fees if they miss a payment.

Afterpay ad for swimwear.

Growing like wildfire

As far as success stories go, Afterpay is a darling of Australian fintech startups. The company went public in 2016 with a $125 million listing and has since reached $7 billion a year in revenue. 

Some of this growth has come from expanding the brand into the United States and United Kingdom where Afterpay is quickly becoming popular.  So much so that by 2022,  Afterpay is forecasting gross sales of $20 billion per annum. 

If that weren’t reason enough for Afterpay to celebrate, Chinese tech-giant Tencent recently made a $300 million purchase of a 5% stake in the company. Some experts say that the collaboration is a step towards expanding Afterpay into China where the platform’s growth could be almost exponential.

Afterpay reports that its users changed their buying habits as the pandemic progressed. 

Source: The New Daily

No interest, but up to 25% in late fees

While Afterpay purchases are technically interest-free, Joanne’s Afterpays were gathering late fees at a rate that would exceed most credit cards. 

According to the Afterpay website:

If a payment is not processed on or before the due date, late fees will apply – initial $10 late fee, and a further $7 if the payment remains unpaid 7 days after the due date. For each order below $40, a maximum of one $10 late fee may be applied per order. For each order of $40 or above, the total of the late fees that may be applied are capped at 25% of the original order value or $68, whichever is less. 

In other words, the cost to customers in late fees for Afterpay is capped at $68 or 25% of the cost of the goods or service, whichever is smaller. If you’re wondering what that works out to as an annualised rate, 25% over eight weeks is the equivalent of 162.5% interest per annum. 

In addition to repaying the purchase amounts, our personal budgeting specialist calculated that Joanne would need to budget around $500 in late fees.

Just how Ernest Hemingway described how he found himself bankrupt—”Two ways: gradually, then suddenly”—Joanne explained that the situation had crept up on her. Her Afterpay account was initially manageable, but as she used the service more, her bills snowballed. Simultaneously, Joanne’s available Afterpay balance increased the longer she used the service.

This is backed up by Afterpay’s website where it says the longer you’ve held an account and the more purchases you successfully repay, the more likely you are to be approved for a higher amount. 

There are no credit checks with Afterpay. Applicants are automatically approved as long as they’re 18 and have a working credit or debit card. Source:

Targeted at young people

Joanne’s experience is not an exception. Over the last 12 months, we’ve noticed an increasing number of people coming to MyBudget for help with out of control Afterpay accounts. We observed one person who had more than 71 Afterpay purchases in 12 months.

Because Afterpay doesn’t calculate interest charges on purchases, they skirt the rules that stop lenders from providing credit where it would be unsuitable. For that reason, we’ve seen a growing problem where people already debt stressed are opening Afterpay accounts. 

In our experience, people with multiple active Afterpay transactions are more likely to have a history of using other buy now, pay later services or payday loans or be in a debt agreement which limits their access to other forms of credit.

A recent Australian Securities and Investment Commission (ASIC) report found one-in-six buy now, pay later customers are in financial trouble and more than half were aged between 18 and 32. 

Afterpay claims that 27% of Millennials (born between 1980 and 2000) in Australia have used their service. Not surprisingly, the instant approval policy skews Afterpay towards a younger demographic that is tech-savvy and credit wary and whose financial experience is still developing.

In this report, Afterpay claims that customers who started using the service three years ago are now using Afterpay more than 20 times a year.

Breaking the buy now, pay later addiction

Our personal budgeting specialist designed a budget for Joanne that factored in all of her expenses over the next 12 months. We weren’t able to help Joanne avoid every Afterpay late fee, but we were able to create a plan that got her back on her feet. 

When Joanne decided to join MyBudget, we were able to speak with Afterpay on her behalf and arranged for her Afterpay bills to be consolidated into a single balance that saved on late fees.

By sticking to her budget, Joanne knew that she would always have money for rent and living expenses, while her debts were gradually paid down. With a budget to follow and MyBudget’s money coaches helping her, Joanne was also better positioned to break her buy now, pay later addiction.

Tips for using Afterpay

ASIC is currently reviewing buy now, pay later services which could result in stronger terms and conditions. In the meantime, keep in mind that:

  • Afterpay is not bound by laws that require them to assess your creditworthiness—neither are you protected by credit regulations as a consumer.
  • Afterpay can increase your account balance without your permission—don’t get carried away with spending more than you can afford.
  • Avoid linking Afterpay to a credit card unless you’re confident of paying off your credit card in full every month—in which case you probably don’t need Afterpay.
  • Make sure you have enough money in your account to pay your Afterpay instalments on time—set an alarm in your phone to remind you when they’re due.
  • Close your Afterpay accounts before applying for a mortgage or personal loan—lenders can be wary of buy now, pay later services and why you need them.
  • If you’re struggling to pay off multiple Afterpays, call Afterpay to ask about consolidating your debts into a single sum to reduce your late fees.
  • Better than relying on buy now, pay later schemes, create a workable budget that frees you from debt and makes sure that shopping doesn’t eat into your long-term goals.

Book a free budget consultation like Joanne. Our personal budgeting specialists work with you to create  a free customised budget that’s yours to keep. Call 1300 300 922 or enquire online.

Read more about budgeting, discover how MyBudget works, sign up for money tips via the MyBudget Blog or follow MyBudget on Facebook.