The recent surge in Buy Now, Pay Later (BNPL) providers in Australia, and across the globe, has created a lot of interest amongst many. This increase has also changed the way a lot of people, particularly younger generations, are shopping. However, just because the BNPL trend is increasing doesn’t mean that it’s a good idea, and it can have a serious impact on your chances to get a pre-approval for your loan to buy your own home or investment property.
Firstly, let’s look at what Buy Now, Pay Later is
Buy now, pay later is a scheme that has been set up for consumers to purchase a product immediately and make payments for it over a specified time period, which could be 3 – 6 repayments over the coming weeks or months for example. In some ways, it is similar to lay-by, which many Australians will be familiar with, however, this model allows you as the consumer to take ownership of the products right away.
Importantly for many, there is no interest that is charged on the purchases that are made. Don’t worry, this doesn’t mean that the providers of these services are charities or aren’t making any money, as they’re often charging fees directly to the merchants who are selling the products to you.
There is a wide range of BNPL providers in Australia including Afterpay, ZipPay, Openpay, Klarna, and many more. We expect that the number of providers in this space will continue to grow, until such time as the regulations change or consumer behaviour shifts. If you are great at managing your cash flows and believe that you’ll be able to make the repayments on time, and you absolutely need the product, you may want to utilise the BNPL offer. However, for many, it is simply a faster way to ramp up their discretionary spending by burning through funds that they don’t have to purchase products or services that they don’t really need.
What’s the difference between BNPL and a credit card?
There are a few key differences with credit cards. Firstly, a credit card application will result in a hard credit inquiry, which will be noted on your credit file and can impact your credit score. A BNPL application is typically just a soft inquiry and has no impact. The BNPL providers are usually not regulated under the National Consumer Credit Protection Act 2009 (NCCP).
Further, a BNPL facility does not demonstrate good credit behaviour and doesn’t improve your credit score, and is also treated as an ongoing expense when applying for a loan. A credit card on the other hand is treated as a liability as it is a facility available to you that you can draw on.
Can a BNPL facility impact my credit score?
There are a few important aspects to bear in mind when it comes to BNPL facilities and your credit score. Firstly, simply applying for the facility itself will often not have any impact on your credit score, in a positive or negative manner. However, if you miss repayments, the BNPL provider typically has the right to report these defaults to credit agencies, and if you’ve linked your credit card to the facility to manage repayments and missed a payment, then this could also damage your credit score.
Under the current legal framework, BNP facilities and transactions will typically show up on your credit report, which the lender will see when carrying out their checks for your loan approval. If you’re slightly late with your repayments, then this may not damage your credit score, however, if you’ve missed repayments by a significant amount of time, this may negatively impact your credit score and damage your chances of getting a home loan approval.
How does a BNPL facility impact my chances of getting a pre-approval?
Relying on BNPL facilities is typically not a positive signal to the bank that you’re looking to borrow money from, as it simply says to the lender that you’re not great at managing your cash flow and have to rely on debt facilities to get by. If you are demonstrating a pattern to the lender that you constantly need to rely on a BNPL facility, then it may mean that your income is not sufficient to cover your expenses. In a low-interest rate environment, this may cause some unease when it comes to their willingness to approve your application.
This doesn’t necessarily mean that you need to close them down before applying for a loan, however, this may be a good idea anyway, and may boost your borrowing capacity as it will be one less expense to be factored into your serviceability assessment.
Usually, if it’s a short-term facility (<6 months) then it will be treated as an ongoing expense, while if it’s >6 months, then it’s treated as a liability. Again, this is a good reason to do your homework and consider if you should close down your BNPL facilities. Some lenders may also request that you repay any outstanding amounts in full before your loan will be approved.
If you currently have BNPL facilities in place and you’re considering your options when it comes to getting your home loan approved, reach out to our team and we can guide you through what you may want to repay, close down, and how the various lenders will treat them.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.