Should you be using Afterpay at your local boutique store or favourite online small business? Are you actually helping and supporting them? We take a look under the hood of Afterpay.

Afterpay has been advertised as a budgeting tool to help you manage your money better. However, the issue with Afterpay is that you’re effectively outsourcing your money management to a product and not learning how to manage money yourself.

By using Afterpay, you’re not really learning how to be in control of your money. While there are the occasional success stories, on balance I can’t find a logical reason to borrow money for consumer items and pay it back.

Afterpay is a debt by its very nature; you take an item without paying for it, and you’re left owing money. Sometimes it helps to say this out loud. The fact that it is interest-free isn’t the issue, it’s that you’re tying up your cash flow and getting ahead of yourself in terms of spending.

The wild west

Afterpay and other buy-now-pay-later (BNPL) schemes operate in the wild west. They currently sit outside of any consumer credit law (National Consumer Credit Protection Act 2009 [Cth]). This is because Afterpay and other BNPL providers do not charge interest, and the payment of goods is settled with the retailer at the time of purchase.

There are other operators entering the market and allowing 10 easy payments, as opposed to Afterpay’s four. So what does this all mean? Personally, I think their time in the sun is limited. My prediction is that if the regulators do not step in, we will soon see other players in the marketplace have “52 easy payments” and so on.

It is also important to understand the genius of payment platforms like Afterpay; really, they make most of their money from retailers, which pay a flat fee and commission to Afterpay for each transaction. At the end of last year, the Reserve Bank of Australia (RBA) flagged these merchant charges as a problem. If you want to use the popular Afterpay in your store (because that is what customers want), you get slugged a percentage of the sale price and can’t pass that on to the customer. Because this is the wild west, this percentage is not regulated.

So should you be using Afterpay at your local boutique store or favourite online small business? Are you actually helping and supporting them? No, not really. By using Afterpay, you reduce the retailer’s profit and instead give more money to Afterpay. As the “easy payments” get blown out, this will allow people to buy higher-value items and therefore increase the commission Afterpay receives from the retailer.

Risky business

There are other risks with these payment platforms. If you apply for a home loan, even though it’s not strictly a “debt” by the book, lenders will look at your bank statements and consider the use of Afterpay while assessing your overall credit profile. The optimal amount of Afterpay transactions on your bank statement is zero.

Although I have not answered the “should I use Afterpay or not” question, I hope this information has helped you to draw your own conclusions, make smart money choices and stay debt-free – even if it’s dressed up as a “budgeting tool”.