You may have heard of Afterpay, Zip Pay, Humm or one of the many other buy now pay lending services. Here is how they work, what happens if you miss a repayment and what to do if you get into trouble.

What does ‘buy now pay later’ mean?

Buy now pay later (BNPL) schemes loan money to people to purchase things, with the loaned amount due to be repaid over a period of time.

Users may pay a smaller upfront amount for something they wish to buy and pay the rest off in regular intervals, such as each week.

For example, if someone bought a $100 pair of shoes under a BNPL arrangement, they may pay $25 in the first week and then $25 each week for the three weeks after that.

However, if payments are missed, there are often fees charged.

For instance, one of the providers, Afterpay, charges a $10 late fee if a payment isn’t made when it is due and an extra $7 if the payment hasn’t been made a week later. Afterpay fees are currently capped at $68 or 25 per cent of the purchase price for each order someone makes (whichever is less).

If payments are repeatedly missed on multiple purchases – or missed with several different buy now pay later providers, the amount of fees owing can add up to hundreds or thousands of dollars.

What can happen to people who miss payments?

A report by the corporate watchdog ASIC released last year found one in five (21 per cent) users missed payments over a 12 month survey period.

More than half of those who missed payments had at least two buy now pay later arrangements set up.

In order to make payments on time, one in five (20 per cent) said they had cut back on essentials like meals over the 12 months.

Meanwhile, 15 per cent said they had to take out an extra loan to help pay for the arrangements, according to ASIC.

For others, the report found the buy now pay later deadlines had seen one in five miss other obligations, like bills, credit card payments or home mortgage payments.

What are the other potential dangers of BNPL?

If several payments are missed, buy now pay later fees can quickly add up and result in spiralling debt, industry groups say.

“Sadly, many people including Aboriginal and Torres Strait Islander people who are lured into BNPL are becoming embroiled in unsustainable, long-term debt,” says Financial Rights Legal Centre CEO Karen Cox.

“BNPL companies use a simple but seductive psychological trick to attract customers. Spreading out the cost of an item makes it feel less expensive, but that doesn’t mean you can afford it.”

Financial Counselling Australia CEO Fiona Guthrie says some companies allow spending of up to $30,000, which makes it similar to credit. She says this can start to affect other parts of life.

“Take Susan*, a client of a financial counsellor who was spending 40 per cent of her income
on BNPL debts and didn’t have enough money left for day to day living expenses, including rent,” she says.

The Financial Rights Legal Centre and Financial Counselling Australia have joined the Consumer Action Legal Centre and Choice in calling for government regulation of buy now pay later products. Currently BNPL companies don’t have to check if you can afford to use their products like other lenders do.

What to do if you get into trouble with a buy now pay later scheme?

If you can’t make a payment, contact the company’s hardship team as soon as possible. You can also ask to suspend your account to prevent further spending.

The National Debt Helpline has more tips here.

You can also speak to a free financial counsellor to come up with a plan by calling 1800 007 007.

*Name has been changed to protect client’s privacy.

This article is not personal financial advice. See phone numbers above to speak to a free financial counsellor.