Buy now pay later products are not free or even low-cost alternatives to credit cards, a team of researchers who calculated an “interest rate” for BNPL argue in a new report.
Financial Counselling Australia commissioned academics from the School of Accounting, Economics and Finance at Curtin University to calculate an effective interest rate on purchases up to A$2000.
“We found that the fee structure of BNPL companies is, in general, highly regressive. The less customers owe, the greater the effective interest rate they are charged,” the report said.
The researchers analysed purchase amounts ranging from $30 to $2000. To arrive at an effective interest rate, they assumed that maximum total late fees were incurred for each purchase. In the case of humm little things and Zip Pay, which charge monthly account fees, the fees were added to the calculation.
For a purchase amount of $40, the effective annual interest rate is 16.13 per cent for humm little things (with five fortnightly repayments), 28.25 per cent for Afterpay, 28.33 per cent for LatitudePay, 29.32 per cent for Zip Pay and 177.44 per cent for humm little things (with 10 fortnightly repayments).
For a $500 purchase, the effective annual interest rate is 4.08 per cent for Commonwealth Bank StepPay, 10.06 per cent for humm little things (five fortnightly repayments), 14.53 per cent for Afterpay, 10.51 per cent for LatitudePay, 15.39 per cent for Zip Pay and 18.36 per cent for humm little things (with 10 fortnightly repayments).
For a $1000 purchase, the effective annual interest rate is 2.02 per cent for CBA StepPay, 4.91 per cent for humm little things (five fortnightly repayments), 7.03 per cent for Afterpay, 5.12 per cent for LatitudePay, 9.97 per cent for Zip Pay and 8.99 per cent for humm little things (with 10 fortnightly repayments).
Financial Counselling Australia chief executive Fiona Guthrie said: “The research provides another reason why BNPL needs to have the same consumer protections as other forms of credit. If someone struggles to make repayments, just like a credit card, they will get lumped with charges that can add up to be on par or more than credit card interest rates, particularly for small purchases.”
According to earlier FCA research, the average BNPL purchase amount is $151.