Whether you’re looking for a personal loan, car loan or mortgage, regularly using buy now, pay later (BNPL) services can have a negative impact on both your credit score and your loan application.
Why will using BNPL platforms impact your loan application?
Lenders have been forced to review what they see as responsible lending following the results of the Financial Services Royal Commission. This means that reaching approval on a loan is tougher than ever. Lenders are obligated to review their applicants’ spending habits and financial commitments with a fine-toothed comb.
Services such as Afterpay are no longer an afterthought for lenders. While BNPL isn’t a traditional form of credit, you will be expected to disclose your use of these services on a loan application. If you don’t, lenders can question your use of these services upon viewing your bank statements, so it’s best to be transparent up-front.
Lenders will deem any payments to these platforms to be discretionary spending. Any outstanding amounts due can be seen as financial commitments, which will affect the loan amount they are able to offer you.
Simply explained, if you have $2000 outstanding on an Afterpay account, lenders will view this as a financial commitment. It can impact the total loan amount you are able to borrow, and whether they will approve the loan at all.
Can it impact your credit score?
Due to the introduction of Comprehensive Credit Reporting or CCR, missed payments to BNPL services can be classed as negative activity. This may be reported to credit bodies and subsequently listed on your credit file. This can include late payments, missed payments, defaults or serious credit infringements.
So, what can you do?
The occasional use of BNPL services does not necessarily need to be an issue, if used in moderation. Some handy tips to prevent lenders from negatively viewing your spending habits when using these services include:
1. If you’re planning on applying for a loan in the near future, pay off any BNPL commitments currently in place. It’s also recommended to avoid using the platform for the short term. As part of your application, lenders will often request three months of your financial history. Be prepared for this by finalising your outstanding balances, or;
2. If you plan on using BNPL regularly, add these expenses to your monthly budget. . This will demonstrate to lenders that you can afford the repayments moving forward, as evidence that you use BNPL platforms responsibly and that you spend within your means.
3. Only make purchases on the platform if you are able to afford the frequency of instalments within the set timeframe. Incurring late fees and charges is not only costly, but will also speak negatively for your ability to budget and responsibly use BNPL services.
4. Be conservative – excessive or consistent BNPL use suggests to lenders that you are living beyond your means.
5. If you are uncertain about your chances of being approved, ask for advice!
Either brokers or financial advisors will be able to assist with any questions regarding your borrowing capacity or how your application might look to a potential lender.
Lenders have a great responsibility when calculating applicants’ living expenses, giving rise to a more conservative approach following the results of the Royal Commission. If you can avoid using buy now, pay later in the months leading up to your credit application, it can help assure your chosen lender of your ability to accurately calculate and manage your day-to-day living expenses.
What is the Buy Now, Pay Later Industry?
The buy now, pay later (BNPL) industry has seen dramatic growth over the last few years, with multiple providers entering the market such as Afterpay, Certegy Ezi-Pay, and Zip Pay. Even retailers such as Jetstar are offering schemes to help their customers buy what they want now and pay for it in instalments.
A recent ASIC review of this diverse and evolving market detailed how buy now pay later arrangements are influencing the spending habits of consumers, especially younger consumers. In fact, 60% of total users of buy now pay later services were aged between 18-34. ASIC also found that buy now pay later arrangements can cause some consumers to become financially overcommitted and liable to paying late fees.
If you have some black marks on your credit history or have dabbled in BNPL services and need a lending solution, LoanU is here to help.
We are passionate about finding options for applicants who may have fallen behind financially and are in need of a solution to move forward. If you are struggling to gain credit approval, we provide a responsible alternative to high-cost, short term loans.
Check if you qualify for a loan with LoanU without damaging your credit score by entering your details into our qualification calculator.