Buy Now Pay Later services have undergone a major shake-up, with the controversial payment option now being regulated as credit.
From Tuesday, June 10, BNPL providers including Zip, Afterpay and Hum in addition to low-cost credit contracts for sizeable purchases will be stringently regulated, with reforms announced in 2023 now requiring firms to have an Australian credit licence and comply with existing credit laws.
Previously BNPL services allowed customers to purchase goods or services with borrowed cash, and to then repay the loan over interest-free instalments, however customers will now be subject to a credit check and questions about outstanding debts before signing up.
The legislation also establishes a new category of low-cost credit, with providers further needing to fulfil regular checks about customers income and expenditure to prevent them from having repayments they could not afford.
The changes will mean new customers who sign up to BNPL services will be able to borrow less than those who have pre-existing contracts.
Previously BNPL firms used to impose a $600 starting limit on all purchases.
Customers should be aware that they may begin see missed or late repayments appear on their credit reports, in turn impacting their credit score meaning it could be harder for them to take out loans.
Australian Retail Credit Association CEO Elsa Markula said “some BNPL providers will report additional information such as repayments, on consumers’ credit reports”.
However, Ms Markula stressed that widely used services, such as Afterpay will report “credit checks only”.
ASIC commissioner Alan Kirkland defended the changes, and said they would ensure consumers would be protected from exploitative deals.
“These reforms are an important step to improve protection for Australian consumers who use buy now pay later products,” Mr Kirkland said.
Existing Afterpay customers will also need to undergo a credit check if they wish to increase their spending limit, with the maximum threshold set at $3000, or $4000 for people who request an increase.
A study from CreditSmart showed that one fifth of consumers, primarily younger Australians use BNPL services and that 33 per cent have not checked their credit reports.
Consumer advocates have advised BNPL customers to regularly check their credit score, and to keep on top of repayments to avoid being caught off guard.
BNPL now ranks as the third most popular credit option, sitting behind credit cards and home loans, with Ms Markula reiterating the changes should make Australians think twice before using BNPL products.
“Apply for credit only when needed; multiple applications in a short time may signal financial stress to lenders,” she said.
“Only take on credit – including BNPL – you can comfortably repay.”
