Struggling With Buy Now, Pay Later? Try Debt Consolidation

03 Jul Struggling With Buy Now, Pay Later? Try Debt Consolidation

With the promise of interest-free periods and flexibility to spread payments over time, Buy Now, Pay Later (BNPL) is an increasingly popular payment method. As convenient as BNPL may seem however, it’s important to understand the potential pitfalls and risks associated with this payment method. For those who find themselves overwhelmed by accumulating debts or struggling to manage multiple BNPL accounts, a debt consolidation loan may be a viable alternative.

Understanding the risks of Buy Now, Pay Later

Buy Now, Pay Later (BNPL) services, such as Afterpay, Laybuy and Zip, offer customers a convenient alternative to traditional payment methods. But this convenience can turn into a financial burden if not used and managed responsibly. To fully appreciate the risks associated with BNPL services, take a minute to understand how this payment method works.

• When buying instore or online, customers can choose BNPL as their payment method.
• Instead of paying the full amount upfront, the cost is split into multiple interest-free instalments spread over a specified period, typically ranging from a few weeks to several months.
• Customers get immediate access to the goods or services they buy without having to pay the full amount upfront.
• Subsequent instalment payments are automatically deducted on scheduled dates without incurring any interest.

Risks of Buy Now, Pay Later:

• Accumulating debts and overspending: The ease with which BNPL can be used may tempt some customers into making impulsive purchases, potentially leading to debt levels that are difficult to manage realistically.
• Late fees and interest charges: Failing to make payments on time can result in hefty late fees and high-interest charges, which may offset any initial savings from interest-free periods.
• Bad credit and financial stress: If not used responsibly, BNPL accounts can become difficult to manage with multiple repayment dates, potentially leading to financial stress and bad credit.
• Not suitable for large expenses: The shorter repayment terms of BNPL, typically up to 12 months, mean higher repayments compared to personal loans with longer terms.
• A significant number of lenders will factor the average monthly spend into serviceability for personal loans and mortgages which may limit the ability to borrow via these facilities.

The advantages of personal loans over BNPL

For those seeking to manage their finances more effectively, personal loans may be a viable alternative. Personal loans – such as debt consolidation loans and bad credit loans – offer similar flexibility and convenience to BNPL, but with a number of added benefits:

1. Higher borrowing limits: Personal loans typically offer higher borrowing limits, which means they may be more suitable for larger purchases or when used to consolidate multiple debts.
2. Longer repayment terms: With personal loans, borrowers can spread repayments over an extended period, making them more manageable and affordable.
3. Greater flexibility: Personal loans can be used for a wide range of expenses, including buying from private sellers, which may not be possible with BNPL which is limited to specific retailers or online platforms.
4. Opportunity for further borrowing: Unlike BNPL, which may restrict additional borrowing due to higher repayment commitments, personal loans can offer greater flexibility and provide an opportunity for additional borrowing that may be needed at a later date.

For example, if a customer spent $1,000 using BNPL payable over four weekly repayments, their repayments would be $250 a week. If the same customer then applied for a personal loan or mortgage, the majority of lenders would factor in the BNPL spend and allocate $1,000 a month into serviceability. That could mean the ability to obtain additional finance is being restricted by BNPL facilities. 

If the same customer instead borrowed $1,000 for a year at 19% via a personal loan, monthly repayments brought into serviceability for any additional lending would be around $93 a month, a significant difference in serviceability amounts and particularly important for customers looking to consolidate debt or get a mortgage to buy property.

Consolidating BNPL debt with a personal loan

For those grappling with mounting debt or juggling multiple BNPL accounts, debt consolidation loans offer a potential solution to streamline repayments and regain financial control. The benefits include:

1. Simplified repayments: Consolidating debts into a single loan streamlines repayments, reducing stress and anxiety.
2. Lower monthly repayments: Personal loans generally offer longer loan terms, resulting in lower monthly repayments compared to multiple BNPL accounts.
3. Avoidance of late fees and penalties: By consolidating debts, customers can avoid the risk of incurring late fees and penalties associated with missed BNPL payments.
4. Improved credit score: Demonstrating responsible financial behaviour by consistently repaying a single, manageable loan can positively impact credit scores over time and improve access to future credit.

Practical, effective credit solutions

BNPL services may offer customers the convenience and flexibility they need, but the inherent risks, potential strain on finances, and impact on creditworthiness are important factors to consider. For those struggling with multiple BNPL debts, debt consolidation through a personal loan may offer a practical and effective solution to help regain control of finances.

If you’re considering debt consolidation or you need advice and guidance about managing your finances or repaying BNPL debt, talk to the team at Max Loans. A Max Loans Personal Lending Adviser can help you explore finance options and make informed decisions tailored to your financial needs and goals.

Contact Max Loans today to connect with a Personal Lending Adviser.

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