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I strongly support the Barefoot Investor, Scott Pape and his not so gentle warning about payday lenders and the buy now, pay later (BNPL) phenomenon called After-Pay virus.

Now his excellent article in the Sunday Telegraph (22 March) is behind a paywall (to help it pay for real journalists, not fake news). He calls out the most insidious, opportunistic lending practice loosely called payday lending and ‘Buy Now Pay Later’ (BNPL). I call it ripping off those who want instant gratification and can least afford to pay.

It includes well-known companies like Radio Rentals, GE Money, Nimble Loans, Wallet Wizard and BNPL outfits like Afterpay. Slick advertising and support from price comparison websites like finder.com.au make it appear normal, even desirable to run up small debts that in reality, can spiral out of control.

At least Finder publishes the mandatory, “This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009 and the Financial Counsellors hotline on 1800 007 007 number. Surely that should set alarm bells ringing.

Non-bank (Payday lending)

Lenders like Nimble, Wallet Wizard, Cash Converters and many more offers up to $2,000 from a 3-12-month term.

A $1000 loan will cost you about $1360/1680 if you pay it back as specified. The lender typically gets a 20% establishment fee from you ($200) and charges 4% flat interest per month – a blistering 48% per annum. Plus, you are not really borrowing $1000 – it is only $800, so it makes it even worse.

But what happens if you default – that can be as little as a day late making a payment. Two things

As Scott says, it can result in a massive 407.6% p.a. interest on a one-month loan.

All manner of fees/charges apply (and you have agreed to them as you did not read the fine print)

  • Late payment fee
  • Arrears fee
  • Statement issue fee

It can go to a debt collection agency (a euphemism for a vicious shark), and you can rack up more costs.

  • Collection Fee (it is not unusual to see fees of 25-50% for smaller amounts), solicitors letter costs, and any court costs (these can be substantial)
  • Collection letters send-out fee
  • And sometimes repossession fees and ‘make good’ if the goods are damaged
After-Pay virus

Many payday lenders ‘sell’ the paper (your loan) to a bigger finance company like Latitude Financial (formerly GE Consumer Finance) that receives a 100% 1-star (less if it could) rating on Product Review. These companies are known for strong-arm tactics to protect their ‘investment’.

My wise mum told me you never buy something unless you can afford to pay cash for it

Well perhaps a house and car can be excluded although there are a lot of dodgy finance brokers out there as well.

First, a personal experience. Long ago (in the mid-70s), I had a wages job (instead of having inordinate fun writing about and reviewing tech – a passion that my current/last wife understands). A junior female colleague told me of a great way to buy household goods at Waltons (forerunner to Norman Ross of the Harvey Norman pedigree).

Called ‘Buy Now, X-months interest-free” so she bought everything from the jug and toaster to the furniture and linen. “It is only $10 a month for the jug and $20 for the Manchester…”

After-Pay virus

After the first month, she missed three of seven payments, and the second month paid the three she had missed and put off the other four. At the end of that month, the debt collector stepped in.

So, she sought my advice. When I added it all up it was clear she had committed to $7,000 of goods (an awful lot in those days), and if she paid it all off over 12-months without default, it would cost her around $12,000. When taking rent, food, transport, and her inalienable night/s at the pub into account, there was no way she could meet even half the monthly commitments.

After-Pay virus
Well, at least now technology tells you when you are bust!

Bankruptcy followed owing over $20,000 and all the goods repossessed. So that $10 per month sounds like a good idea, but it is not and has spoiled her credit rating even to today. Had the bank given her a 12-month personal loan for the same $7,000 she would have paid (at today’s values) $624 per month and a total of $7490 (7% PA).