Buy Now, Regret Later? The risks and benefits of Afterpay

The convenience and benefits of Buy Now Pay Later are appealing, especially to younger generations, but there are important risks to understand, including the impact it has on your potential to borrow

In recent years, a new way to shop has taken Australia by storm. Known as "Buy Now, Pay Later" (BNPL), this payment method allows consumers to split their purchases into smaller, interest-free instalments. Among the most recognisable names in this space is Afterpay, an Australian-born company that has revolutionised how people pay for goods and services. From fashion and beauty to electronics and travel, Afterpay has embedded itself in the everyday retail experience.

But while the convenience of Afterpay is appealing, especially to younger generations, there are important benefits and risks to understand. As BNPL services become more widely used—and increasingly scrutinised—Australians should be aware of how they work, who they’re best suited to, and what to watch out for.

What is Afterpay?

Afterpay is a digital payment platform that allows consumers to purchase items immediately but pay for them later, typically in four equal, fortnightly instalments. It was founded in Sydney in 2014 and quickly gained popularity, especially among millennials and Gen Z shoppers.

Here’s how it works:

1. A customer selects Afterpay at checkout, either online or in-store.

2. They pay the first of four instalments upfront.

3. The remaining three payments are automatically deducted from the customer's linked debit or credit card every two weeks.

4. If payments are made on time, there are no interest charges or fees.

   
   

Afterpay is now accepted at thousands of retailers across Australia, including major names like Myer, Kmart, The Iconic, JB Hi-Fi, and even some medical and dental services. Like the old 'Lay Bye' that used to be available in major stores, Its appeal lies in its simplicity and the ability to spread the cost of purchases without traditional interest-bearing loans or credit cards. But unlike Lay Bye, you get access to the goods or services before you've finished making the installments.

The Rise of Buy Now, Pay Later in Australia

Australia has been a global leader in the adoption of BNPL services. In fact, it’s estimated that more than 7 million Australians have used a BNPL platform, with Afterpay leading the pack. Its rapid growth reflects a broader trend: a shift away from credit cards and traditional financing options towards more flexible, digitally-enabled solutions.

Afterpay's model differs significantly from conventional credit. It doesn't charge interest and it doesn’t require a hard credit check to use, which makes it more accessible to a broader range of people. But that same accessibility also raises questions about affordability, financial responsibility, and regulation.

The Benefits of Using Afterpay

Afterpay isn’t just popular because it’s trendy—it offers a number of genuine benefits to consumers and retailers alike. These include:

1. Interest-Free Payments

The biggest drawcard for Afterpay users is the ability to pay off purchases over time without incurring interest. This can be a game-changer for people who want to manage cash flow, especially in between pay cycles.

2. Easy to Use and Widely Available

Signing up is quick, and Afterpay is integrated into many major retailers’ checkout processes. Once approved, you can use it both in-store and online, with a digital barcode generated in the Afterpay app for physical transactions.

3. No Hard Credit Check

Unlike traditional credit products, Afterpay doesn’t perform a hard credit check when you apply. This means it won’t impact your credit score, at least initially, and is accessible to people who may not qualify for credit cards or loans.

4. Budgeting Tool

When used responsibly, Afterpay can act as a budgeting tool. It breaks down larger purchases into smaller, more manageable chunks. Notifications and due date reminders help users keep track of upcoming payments.

5. Encourages On-Time Payments

Afterpay suspends your account if you miss a payment, preventing you from making new purchases until your debt is settled. This can act as a built-in discipline mechanism, encouraging prompt repayment.

6. Helps Retailers Increase Sales

Retailers also benefit from offering Afterpay. It can drive higher conversion rates, increase average order values, and appeal to younger demographics who may not use credit cards. Afterpay pays the retailer in full (minus a commission), taking on the credit risk themselves.

The Risks and Downsides of Afterpay

Despite the benefits, Afterpay comes with several potential risks that consumers should be aware of before using the service.

1. Late Fees

While Afterpay doesn’t charge interest, it does charge late fees. These can be up to $10 for a missed payment, with an additional $7 if it remains unpaid after seven days. For smaller purchases, these fees can represent a significant proportion of the total cost.

2. Overuse and Overspending

Because Afterpay makes it so easy to purchase items without immediate full payment, it can encourage impulse buying. Many users fall into the trap of purchasing beyond their means, accumulating multiple payment plans that become difficult to manage.

A 2023 ASIC report found that 21% of BNPL users cut back on essentials such as meals to make repayments, and around 15% had taken out an additional loan to cover BNPL debts.

3. Lack of Regulation (Until Recently)

For years, BNPL providers like Afterpay operated in a legal grey area, largely outside the regulatory framework that governs credit providers under the National Consumer Credit Protection Act. This meant fewer protections for consumers and less oversight of responsible lending practices.

However, the Australian Government announced plans in 2023 to regulate BNPL as credit products, meaning providers like Afterpay will soon need to perform affordability checks and comply with responsible lending obligations.

4. Impact on Credit Health

Although Afterpay doesn’t report directly to credit bureaus (yet), some third-party BNPL services do. And while Afterpay’s missed payments don’t currently impact your credit score, that could change under future regulations or if debts are passed on to debt collectors.

For any potential mortgage application you're considering, banks consider your BNPL commitments when assessing your ability to repay loans or mortgages. In other words, like a credit card limit, Afterpay debts still affect your broader financial position and reduce your borrowing capacity.

5. False Sense of Affordability

Splitting a $200 item into four $50 payments can make it feel more affordable, even if it’s not something you truly need. This “psychological discounting” can lead to purchasing decisions that would not have been made if full payment were required upfront.

Who Should (and Shouldn’t) Use Afterpay?

Afterpay can be a helpful tool for some people—but not everyone. Here's a quick guide:

Afterpay May Be Suitable If:

• You have a steady income and are confident in your ability to manage cash flow.

• You use it for planned purchases, not spontaneous ones.

• You always pay on time and avoid fees.

• You’re looking for an interest-free alternative to a credit card.

  
  

Afterpay May Not Be Suitable If:

• You’re living pay-to-pay or have other forms of debt.

• You have trouble budgeting or often miss bill payments.

• You’re using it to finance essentials like groceries or bills.

• You already have multiple BNPL services in use.

  
  

Tips for Using Afterpay Responsibly

If you do choose to use Afterpay, here are some strategies to avoid common pitfalls:

1. Set a Personal Spending LimitJust because Afterpay approves a $1,000 limit doesn’t mean you should use it. Set your own internal cap based on your income and expenses.

2. Avoid Multiple BNPL AccountsIt’s easy to lose track of payments if you’re using several BNPL platforms like Zip, Klarna, or Humm. Stick to one and monitor your payment schedule closely.

3. Link to a Debit Card, Not CreditThis way, you’re using your own money and not accruing interest on your repayments, which can happen if you link to a credit card.

4. Don’t Use It for EssentialsIf you need to use Afterpay for groceries or petrol, it may be a sign of deeper financial stress. Seek help from a financial counsellor if this is the case.

5. Use the App’s ToolsAfterpay provides reminders and payment schedules via its app—use them to stay organised. You can also view upcoming payments and adjust your payment method if needed.

   
   

The Future of Afterpay and BNPL in Australia

As BNPL becomes more mainstream, regulation is catching up. In 2024 and beyond, Australians can expect increased consumer protections, including stricter assessments of a user’s ability to repay.

At the same time, major banks and fintechs are entering the BNPL space, offering new products with different terms, rewards, or credit limits. Afterpay, now owned by US payments giant Block (formerly Square), will need to continue evolving to stay competitive.

Retailers, too, are adapting. Some are introducing their own in-house BNPL options, while others are adding warnings or financial wellness advice at checkout.

Final Thoughts

Afterpay has fundamentally changed the way many of us, and particularly younger people shop, offering convenience, flexibility, and a pathway away from traditional credit.

But with great convenience comes great responsibility. Used wisely, Afterpay can be a valuable budgeting tool. Misused, it can lead to fees, financial stress, and long-term consequences.

As with any financial product, the key lies in understanding how it works, knowing your own financial limits, and making informed, intentional choices.

If you’re ever unsure about your finances, remember that free, confidential help is available from services like the National Debt Helpline (1800 007 007) and ASIC’s Moneysmart website.

Being informed is the first step to staying in control. Don't hesitate to be in touch if there's anything you need to discuss about your current fincial situation before applying for a mortgage.