Most people don’t know that when you use a Buy Now Pay Later payment arrangement you are given a credit limit, and that even after the debt is paid off your account remains active, and that credit limit is included in any future finance or home loan application.
This is what we call a hidden risk with Buy Now Pay Later accounts – even when you have no active accounts!
What Are These Buy Now Pay Later Accounts?
A few years ago we had never heard about the concept of Buy Now Pay Later. If we didn’t have the money at the time of purchase we either put it on the credit card or signed up for a hire purchase that spread the payments.
Prior to that we had lay buy where we paid the purchase price over time before we were able to take the items home.
Now we have Buy Now Pay Later and it’s becoming so popular, but also is a hidden risk that is causing many loans to be declined without people ever learning why.
With buy now pay later you are able to make a purchase and rather than pay at the checkout you can select the options of buy now pay later. It is easy to get approved and you’re told in seconds via automated approval then you make a partial payment (a small down payment) such as 25% of the overall purchase amount and the balance can be paid off interest-free with installments.
These types of arrangements can be advantageous to both sellers and buyers as the ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors.
The sellers pay to use the Buy Now Pay Later arrangements, and the buyers get the credit facility for free if they make the repayments on time.
It seems like a perfect option for the buyers!
But using a Buy Now Pay Later offer may not always be a wise move, especially if it encourages spending more than you can really afford.
There are some popular service providers in New Zealand including Afterpay, Humm, Zip, Laybuy, Genoapay (Latitude), Openpay and, Klarna.
Understanding Loan Auto Approvals
Most loan applications are assessed automatically these days, and when that happens the lenders systems rely on information that is available within the credit agencies like Centrix and also from ‘scraping’ bank statements for transactional data.
These days credit agencies hold a lot more data on you, and this is how they establish a credit score.
That data includes all credit enquiries and any defaults (or bad debts) as it has for many years, but it also includes accounts and credit facilities that you may have open or closed including credit cards, hire purchase, overdrafts, personal loans, vehicle loans etc. As well as knowing what the loan amounts or limits are, it shows if you make the repayments on time each month.
It’s therefore important to understand how the lenders calculate the financial commitment of the various types of debts:
- Credit Cards – the banks calculate the monthly financial commitment at 3.8% of the limit not what is actually owing. In the case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $380 regardless if you owe just $6,000.
- Store Cards – they are treated the same as credit cards so the banks calculate the monthly financial commitment at 3.8% of the limit not what is actually owing. In the same case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $380 regardless again if you owe just $6,000.
- Buy Now Pay Later – the banks calculate the monthly financial commitment at 5.0% of the limit not what is actually owing. Using the same case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $500 regardless if you owe just $6,000. WARNING: In many cases with Buy Now Pay Later you may have used a facility once and after it’s been paid off you have forgotten about it; however it may still exist with a limit and the banks will see these when they do a credit check and include them into the calculations.
- Personal Loans – the banks will use the actual amount of the repayment which of course is more accurate. Using the same case where you may have limits that total $10,000 then if the $6,000 owing was a personal loan then even at a typical bank interest rate of 12.90% (over 5-years) that would mean the monthly expense is $136 and you may still have a credit with a limit of $4,000 and nothing owed then at 3.8% that is $152 meaning a total monthly expense used of $288 which is considerably less than the other options.
Don’t assume that you have no debts, it’s always a good idea to check in advance and make sure that nothing unexpected is listed.
Get Your Credit Check Before You Apply
You can get a copy of your credit check before you apply for a loan.
It’s free from Centrix
The lenders rely heavily on your credit check and they are looking at your overall profile which includes your credit score and they look at how many open accounts you have and if they are paid on time too.
If you have any open accounts including Buy Now Pay Later that you are not using then you should make sure that they are paid and closed before you apply for a new loan.
You should give yourself the best chance of being approved, and that includes getting rid of as many loans as you can before you apply.
If you are unsure or are just curious what you can borrow then you could get a quick assessment for free. This will let you know what you could borrow and more importantly it can highlight what changes you should make to improve your chances of being approved in the future.
