Short-term finance service considered an issue, says brokerage
A Queensland brokerage is warning prospective home buyers of the perils of using buy now, pay later, saying it could work against them when it comes time to apply for a mortgage.
Lenders are now taking a harder line on BNPL activities, which the brokerage says are now appearing on credit reports.
Traditional layby services allowed consumers to pay for items in instalments, with possession of the goods held by the retailer (seller) until full payment was received. BNPL is the modern, digitised version, giving the consumer immediate possession of the goods. The service enables a consumer to pay a defined portion of the price upfront, with the balance paid in instalments over a set time.
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Cara Giovinazzo (pictured above), founder and senior mortgage broker at Borro, said users of such services need to be mindful of potential impacts on their credit score.
Lenders are taking a harder line on BNPL activities – just a couple of transactions could lower credit scores and reduce borrowing capacity, she said.
As BNPL activities previously didn’t show up on comprehensive credit reporting, Giovinazzo said they were a convenient option for consumers wanting to pay off larger items purchased online.
“We are seeing buy now pay later facilities appearing on client’s credit reports and significantly reducing their credit scores, which was not the case in the past,” Giovinazzo said.
Giovinazzo, named one of MPA’s Elite Women for 2022, is now warning users of BNPL services to consider the impact it may have on their ability to be approved for credit in future.
“When you start an application with a BNPL facility (even if you don't proceed or aren't approved), this is recorded on your credit score and reduces your score by approximately 50 points,” Giovinazzo said.
On average, consumers start with a credit score in the 700 range, Giovinazzo said, noting many lenders require a score above 600. Consumers who have two or more BNPL credit enquiries against their name could find their ability to get a mortgage severely impacted, she said.
Giovinazzo also warned borrowers that ongoing conduct around BNPL activities (i.e. their ability to meet the repayment requirements) is now provided to credit reporting bodies.
“If you have missed a repayment or had conduct issues on your buy now pay later facility, this could significantly reduce your score,” Giovinazzo said. “When applying for credit, you will have to explain the reasons behind the late payment. A lender could decline your application based simply on the conduct of the facility.”
An Australian Banking Association spokesperson confirmed to MPA that applications and opening dates for BNPL can be included on an individual credit report.
Consistent with credit reporting legislation, repayment history and defaults on buy now pay later products are not included, the spokesperson said.
“In assessing whether to provide a loan, the law requires a bank to consider an individual’s income and expenses, including any credit liabilities or expenses incurred through BNPL which can appear on a customer’s bank statement,” the ABA spokesperson said.
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According to Giovinazzo, in addition to getting a loan approved, BNPL can affect borrowing capacity, as many lenders consider it an ongoing liability.
“Previously, lenders saw buy now pay later facilities as an extension of declared living expenses. If you were declaring $500 a month on clothing, and had $500 on your BNPL facility, they would not consider the BNPL facility a liability,” Giovinazzo said.
“Now, most lenders are adding it as an ongoing liability, even if you owe nothing on it, which is reducing the amount of money you can borrow.”
According to the Reserve Bank of Australia, the buy now, pay later sector has grown rapidly, with new providers and business models emerging.
An Australian Banking Association spokesperson confirmed to MPA that applications and opening dates for buy now, pay later can be included on an individual credit report.
Consistent with credit reporting legislation, repayment history and defaults on buy now pay later products are not included, the spokesperson said.
“In assessing whether to provide a loan, the law requires a bank to consider an individual’s income and expenses, including any credit liabilities or expenses incurred through BNPL which can appear on a customer’s bank statement,” the ABA spokesperson said.
