Ahh, the sugar high of buy-now-pay-later schemes like AfterPay. What’s not to love about getting what you want today and then managing your repayments over time?
But did you know that your shopping habit could be sending the wrong message to lenders and has the potential to jeopardise your chances of getting a home loan?
Buy-now-pay-later providers such as AfterPay and Zip Pay have experienced massive growth in recent years. In fact, the number of AfterPay users jumped from 400,000 to approximately 2 million between 2015 and 2018.
Whilst many users of these services use them sensibly, others are getting themselves into hot water.
“I’ve seen AfterPay work well for people who use it as a way to keep more money in their offset account for longer. This helps to reduce the amount of interest they pay on their mortgage. As long as they are spending within their means and paying off their AfterPay debts on time, this is a strategy that can work well,” said Cat Denney from Nook Money.
“Where it doesn’t go so well is when people use services like AfterPay to buy things they really can’t afford. This can put people in a stressful situation if they can’t meet the repayments on time. And if left unmanaged, it can impact their credit profile and potential to get a home loan.”
AfterPay does not run any enquiries on your credit file when you first apply to use the scheme. However, if you start to run late or miss your repayments, AfterPay has the right to run a check and report negative activity.
When you apply for a home loan, most lenders check your credit file. Multiple enquiries from buy-now-pay-later providers and negative reports can raise a red flag. It tells the lender that you have trouble meeting your commitments and managing your money.
“Even if your overall credit score is still ok, this sort of activity could prompt the lender to ask more questions and dig deeper into your spending behaviours. It could mean the lender declines your application,” said Cat.
“At the end of the day, it’s important to remember that it’s a privilege to be lent large sums of money by a bank. You need to be able to demonstrate financial discipline and a commitment to meeting your mortgage repayments when the time comes. When helping clients prepare for home ownership, I find a money flow strategy and savings plan can really help to keep people on track.”