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Interest-Free Finance, Digital Lay-by—What’s the Difference?
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By MyBudget Editor

Afterpay, Zip Pay, Ezi-Pay, Gem Visa, GO MasterCard, Creditline, Buyers Edge… All of these are ‘buy now pay later’ services. Each of them allows customers to receive their goods or services immediately and pay for them over time. But how do these deals really work? Are there any pitfalls and what are the tips to avoid them? In this article, we dive in and compare interest-free finance and digital lay-by payment options.

Let’s begin where it all began

Since the dawn of commerce, merchants have been dealing with the single most insurmountable buyer’s objection: “I can’t afford it.” And in two or three thousand years, not a lot has changed. Affordability is still a hurdle and the driving reason that merchants are constantly looking for flexible ways for customers to pay. This is the gap that consumer finance intended to bridge. To complicate things, we now have lots of different consumer finance products and providers to choose from.

Interest-free finance is one such option. You know what it looks like—you walk into a shop and there are posters advertising “Interest-Free Finance Available Here!”

         Example of interest-free finance advertising


The first thing to note is that this is not a generous take-your-lay-by-home scheme. The merchant has partnered with a finance provider. Some of the most common interest-free finance companies in Australia are Gem Visa Card, GO MasterCard, Creditline and Buyers Edge, as well as many others.

It’s a credit card

Even when people do realise that the money for their purchase is provided by a third party, many don’t fully appreciate that applying for an interest-free deal, like the Snooze offer shown above, is exactly the same as applying for a credit card. The only difference is that the merchant helps with the application and submits it to the lender.

Under the requirements of the National Credit Code, the lender then assesses the borrower’s creditworthiness and decides to approve or decline them. If the deal goes through, the buyer leaves with their goods—and a line of credit.

So, how does the finance provider get paid? They get paid in multiple ways. Firstly, they receive a commission payment from the retailer based on a percentage of the loan amount. Secondly, the borrower pays them an application fee, and/or annual card fee, plus monthly account charges. Thirdly, the lender makes buckets of dosh in interest charges when around 20% of people don’t pay off their purchases within the interest-free period.

Potential pitfalls of interest-free finance

Just as with a credit card, the minimum monthly repayment on an interest-free line of credit is generally 3% of the balance or $25, whichever is higher. Therefore, to work out your actual repayments, you’ll need to divide your loan balance by the number of months in the interest-free period—eg. $1200 divided by 12 interest-free months = $100/month. You’ll also need to factor in fees and charges.

After the interest-free “honeymoon period” has lapsed, the lender will start charging interest on any remaining balance, at a rate of up to 12 to 19.95% per annum. Keep in mind that the lender isn’t obliged to tell you when the interest-free period is ending or to work out how much you should repay to avoid interest charges. That’s your job. Lastly, be especially careful about drawing cash against a line of credit. Cash loans usually incur daily interest.

Let’s compare that with digital lay-by services

The latest iteration of ‘buy now pay later’ deals are called “digital lay-by services.” Afterpay is the most popular, followed by a string of others, such as Certegy Ezi-Pay, Zip Pay and Openpay. Like traditional interest-free finance, they allow the buyer to receive their goods or services immediately and pay via instalments. In the case of Afterpay, for example, the buyer pays by automatic direct debit in four equal, fortnightly repayments and can have up to three orders on the go.

                  Example of Afterpay advertising


Is it popular? You betcha. Afterpay’s annual revenue surged by nearly 400% to $113.9 million last year. Afterpay reported that it earned around 24% of its income from late fees and the balance from merchant fees. (Merchants pay 30 cents per transaction, plus a commission fee based on around 5% of the sale.) Afterpay’s meteoric rise has a lot to do with its integration model. Shoppers can use Afterpay online or in-store and it applies to goods of all value, from humble haircuts to dental treatments.

Is Afterpay a loan? Not technically. Afterpay and other similar digital lay-by services fall outside of the National Credit Code because they don’t charge the user any interest. Instead of interest charges, users incur late fees. According to Afterpay’s terms and conditions: ‘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.’

Afterpay may not come under the National Credit Code, but that doesn’t mean that digital lay-bys can’t affect your credit rating. Late payments could still appear in your payments history. As with an interest-free line of credit, an Afterpay account counts towards the borrower’s credit liabilities, even when the balance is zero. It’s not uncommon for banks and other lenders to ask home loan applicants to first close down any ‘buy now pay later’ accounts.

Potential pitfalls of digital lay-bys

Late fees are the most obvious downside of Afterpay. By its own report, the digital lay-by market leader collected $28.4 million in late fees from Australians last year alone. That’s a lot of buying power that went down the drain. But to be honest, we’re more worried about the long-term effect on people’s spending habits. It’s especially concerning to see people use these services on relatively small purchases because it suggests they might not be making the most of their money.

It’s also hard to look past the fact that there’s loads of money to be saved by using cash! Merchants who advertise ‘buy now pay later’ deals are fair game when it comes to expecting a cash discount. Smart shoppers know that retailers have margins built into their pricing (over and above their profit margin) to account for the cost of finance—and that’s why they save for the things they want. When they turn up to buy, they have money in their pocket and no hesitation asking for a cash discount. All it takes is a little discipline and the life-changing magic of a budget.

Become a smarter shopper

If you like the idea of saving for the things you want, contact MyBudget today. We’ll help to design a free customised money plan that has you saving (and shopping smarter) in no time.

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