The use of buy now, pay later schemes could be harming your chances of securing a good home loan

The wonders of buy now, pay later schemes mean that you can buy that skirt, phone, holiday or gift as soon as you want it, and then pay for it when you have the money. However, unlike the once-popular layby, buy now, pay later schemes do not offer a lot to consumers in the long term, other than letting them have the immediate satisfaction of owning the new ‘it’ object(s).

Griffith University financial planning lecturer Dr Katherine Hunt said there was no upside for using buy now, pay later schemes, like Afterpay and zipPay, that allows consumers to collect goods and pay them off in instalments.

“We used to have lay-by and we still do at many shops and it’s a healthy way to build up towards a bigger purchase because you don’t end up in a cycle of debt. With schemes like Afterpay, it’s so easy for people to use it and they can get into a cycle of spending rather than saving.”

This saving-spending cycle is incredibly important when applying for loans because banks look at the expenditure of applicants when assessing their ability to service a loan. The problem with buy now, pay later schemes is that banks can see that you are pushing your expenses into the future, giving them the impression you may not be able to, or willing to, repay the loan on time. Even if you use the schemes appropriately and meet repayments on time, you will find they don’t help your case much because they are a spending mechanism, not a savings mechanism.

“Even its paid off in time and without incurring interest, it’s just something that you are using for spending and definitely not something that’s going to look like you’ve got a really good ability to buy a home,” Dr Hunt said.

With the recent start to open banking, the importance of taking these schemes into account cannot be understated. Continuous use of them to purchase items establishes that you spend rather than save.

Financial Broker’s Association of Australia managing director Peter White said that any default on buy now, pay later schemes could have consequences.

“The risk is real because it is a debt and the more of these you take on, it becomes part of your risk profile,” Mr White said. “If you roll one into another, into another and you have been doing that for two years, a lender might see a habit of doing and see it as a long term debt position and hinder your chances of obtaining a loan.”

Consumer and finance lawyer Graham Doessel said a desire to have the latest smartphone but not the means to pay it off on time could potentially lead to home loan application being rejected.

“You’d be amazed how often something simple as buying a new phone can snowball into a full-blown credit crisis for some people,” Mr Doessel said.

“Once you have a few of these in a short period on your credit file you run the risk of being rejected outright for a home loan.”

It’s worth taking note of this advice if you’re considering buying a home in the coming months or years. For first home buyers, downsizers and investors alike, using buy now, pay later schemes is one decision you might want to reconsider.

Written: 19 March 2020

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