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The buy now, pay later revolution is changing the way Australians are shopping. However, just because it is popular doesn’t mean you should use it. Let’s take a look at what buy now, pay later is and how it can affect your chances of home loan approval.

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What is buy now, pay later?

Buy now, pay later or BNPL is an arrangement that allows you to purchase or order a product immediately while you make payments over a specified time. The main selling point; there is no interest charged on any purchases made.

What BNPL companies are in Australia?

Buy now, pay later in Australia	Credit limit	Repayment schedule	Late fees
Afterpay	Up to $2,000	Four equal fortnightly instalments	Late fees of $10 and $7 more if not paid within a week. Late fees are capped at $68 or 25% of the purchase price (whichever is lower)
ZipPay	Between $300 and $1,000	You can pay instalments with a weekly, fortnightly or monthly schedule	$5 late fees
Humm	Up to $30,000	For little things (purchases below $2,000, five OR 10 monthly payments) For big things (purchases up to $30,000, 60 monthly payment plan)	A late fee of $6 for each missed payment.
Bundll	Up to $4,000	12 weeks	$10 late fees
Openpay	Up to $17,000	Flexible repayment plans (depends on the size of purchase), choose between weekly, fortnightly or monthly	$9.50 late fees
Klarna	The minimum is $10 and the maximum is $2000	Four equal fortnightly instalments	Any late repayments on purchases below $50 do not incur a late fee. For purchases $50 and above, the fee is capped at $3 per instalment missed. The maximum additional cost a customer could pay per order is $9.

When should I use buy now, pay later services?

• If you don’t have a credit card or don’t want a large balance on your credit card.
• If you need to pay for a high-demand product before it sells out.
• If there are seasonal sales and discounts.
• If you face or anticipate financial hardship and need to spread the purchase cost, it doesn’t burn a hole in your savings.
• If you are careful and can keep track of purchases made and make repayments on time when due.

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Buy now, pay later vs credit card: what’s the difference?

Point of difference	BNPL	Credit card
Credit enquiry	Some companies perform a soft credit enquiry, but this not affect the credit score	A hard credit enquiry affects your credit score
Regulation	It is not regulated under the National Consumer Credit Protection Act 2009.	It is regulated under the National Consumer Credit Protection Act 2009.
Application process	Fast and easy, as there is no credit check. Once you’re approved, you can start purchasing right away.	It takes time, as a credit check is performed. Once approved, you have to wait for the credit card to arrive before you start using it.
Credit limit	Most offer a set credit limit of around $2,000, and the maximum can go up to $30,000.	Most offer a set limit of between $1,000 and$100,000.
Repayment	You can spread the cost of the purchase in smaller instalments without paying interest.	You have to pay for your purchase at once when it’s due.
Building credit	It does not increase your credit score or help to build credit.	Helps to build credit and improve credit score if repayments are on time
Bank assessment	Listed as living expenses or ongoing liability and can reduce your borrowing power	The full credit-card limit is assessed and can reduce borrowing power.

Can BNPL affect credit score?

Yes, they can. BNPL companies are not recognised as credit providers since the National Consumer Credit Protection Act 2009 or NCCP Act does not regulate them. These services on their own cannot affect your credit score. While some companies perform a soft credit check, it does not affect your credit score, as a soft credit enquiry is not listed on your credit report. However, even if they’re not recognised as credit, they can still affect your credit:

• If you default on your payments, they reserve the right to report the defaults to credit reporting agencies. Once these appear on your credit file, your credit score is affected.
• If you’ve linked your credit card with a BNPL account and miss monthly payments, it will damage your credit score.

Does BNPL build credit?

No, having a BNPL account does not build credit. Using it does not help in building a good credit history, as meeting scheduled payments are not regarded as positive credit behaviour. Since consumer protection laws do not bind them, they do not need to comply with responsible lending obligations. The companies do not examine income or your existing debts before determining if you can make repayments.

Does buy now pay later show on my credit report?

As per changes in the Australian Credit Reporting Data Standards on how credit providers share data, BNPL transactions and facilities will be recorded on your credit report.

• A BNPL transaction will appear under the code BT
• A BNPL facility will appear under the code BF
• BF and BT will appear on either Accounts, Enquiries or Defaults on the Equifax report

A transaction is a once off purchase / payment while the facility is the ongoing account that you may use for multiple transactions. Even though BNPL transactions and facilities appear on your credit report, serious arrears will not receive any penalty score and perfect repayments do not positively affect your score. If you are over 60 days late then this may result in a default being lodged on your credit file which is likely to significantly reduce your credit score.

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Does buy now, pay later affect home loan approval?

Yes, it can affect your chances of home loan approval.

• It could affect your credit score.
• It could be a signal to banks that you’re not great at managing your finances.

If your spending on BNPL is left unchecked, you could spiral into debt, get black marks on your credit file, and ruin your credit score. If you’re too reliant on buy now pay later to make purchases, then it can be an indication that you’re having financial hardship or that you’re poor at money management.

Will I need to close my BNPL account to apply for a home loan?

No, you do not. It is a misconception that you need to close your account before applying for a home loan. BNPL does not automatically lead to a negative effect on your application if you have kept up with repayments. As long as the amount of debt does not affect your ability to make home loan repayments, you should be fine.

How do banks assess buy now, pay later transactions?

In a lending environment where banks and lenders are looking through your financials with a fine-toothed comb, you need to be aware of how these services are assessed. Different banks and lenders have their credit policy on how BNPL transactions are assessed.

• Most banks will include these services as living expenses when calculating borrowing power.
• If a credit check reveals a buy now, pay later enquiry, it is listed as a liability. Afterpay is not listed as a separate liability, as there is no credit check; however, ZipPay requires a credit check and has a separate credit limit and should be listed as a liability.
• If the term on buy now, pay later is less than six months, it is treated as living expenses. If it’s more than six months, it is treated as a personal loan. If there is a credit limit but no maximum term, it will be treated as a credit card.
• Even though it is an interest-free purchase facility, some will consider it like credit-card debt, especially if there are ongoing payments.
• If your buy now, pay later repayment is higher than $250 every fortnight, it can be a credit risk.
• Some banks might even require BNPL facilities to be paid in full before formal approval.

How does buy now, pay later affect borrowing power?

Banks are scrutinising your living expenses and financial obligations to assess your borrowing power. BNPL payments are automatically deducted from your bank account, credit/debit card and will leave a footprint on your bank statement. This is visible to lenders when you apply for a home loan. The lender will look at your expenses and income to work out how much you can borrow. The following can reduce your borrowing power when you’re using BNPL services:

• If multiple transactions are made using these services, you must pay the instalments within a short time. It can signal banks that you were short on cash in the short term as you repay these debts.
• If banks spot a pattern that you’re reliant on using them, it signals them that you’ve stretched your expenses.
• The most significant risk lies in using these services when you’re already in bad credit, as it might seem you’re frivolous with your spending and have made no efforts to improve your credit score.
• If you’re making payments for BNPL purchases with another credit facility, it could be a sign you’re under financial hardship and have undisclosed financial commitments or expenses.

Not all purchases made with BNPL services are of concern to banks. If you’ve fully paid off the balance of the account, it does not present any risk to your mortgage approval. If you’re using these services, you will need to disclose them as the bank or mortgage broker will find out about it when they take a deeper look at your bank statements. Be upfront about it, especially if you’ve been diligent with your payments.

How can I improve my chances of home loan approval?

To reiterate, using a buy now, pay later account does not mean you’re home loan application will be declined. If appropriately used, it can be a budgeting tool to keep your expenses in order. Here are some tips on how you use buy now, pay later responsibly and improve your chances of home loan approval:

• Do not use multiple accounts, as it can be difficult to track how much you’ve spent on each platform and budget repayments.
• Plan to make sure you have the funds to make payments on time. Set a realistic budget and stick to it.
• Do not link your account to a credit card. A credit card can lead to further debt and incur interest. If you use a debit card, you’re using your own money to pay instalments.
• Set reminders to check there are sufficient funds available when instalments are due. The instalments are automatically deducted from your nominated account. If you have sufficient funds, you avoid late fees.
• Read the fine print. Some companies perform a credit check, and some even report defaults to credit agencies.
• Try not to use these services if you have pressing debts and commitments to pay. You do not want to add more debt when you’re applying for a home loan.
• Try to reduce commitments and make early repayments if you can afford them.
• Do not use BNPL to purchase items and services you can’t afford.
• Tell your bank that you’re using buy now, pay later when applying for a home loan. You will be asked about it to ensure you have a good grasp of your finances and the banks like to avoid surprises when they do a credit check.

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The bottom line, at times when it’s harder to qualify for a home loan, it’s best to be vigilant about your expenses. At Home Loan Experts, we can provide you with a free credit report to check if your buy now, pay later purchases could affect your chances of mortgage approval. Our mortgage brokers will help weed out unnecessary debts and expenses to improve your chances of getting a home loan approved. Call us on 1300 889 743 or enquire online for a free no-obligation assessment.

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