Afterpay vs. ZipPay

• Afterpay and ZipPay have cornered the market for popular ‘buy now pay later’ options.
• We compare the pros and cons of Afterpay and ZipPay.
• But could a credit card be a more rewarding option to consider?

Afterpay and ZipPay are two of the newest kids on the ‘buy now pay later’ scene. So we thought we’d get into the nitty-gritty of what they’re all about.

If you’ve been living under a rock, this type of finance lets you buy now and pay for your purchase later. For a few years they stayed predominantly online, but now they’ve made their way into brick and mortar stores too.

When did ‘buy now pay later’ become a thing?

This type of financing has been around in some form for years. Who hasn’t bought white goods from Harvey Norman on interest-free finance?

But that type of payment plan was usually for big purchases, and it came with hefty fees and interest rates if you didn’t repay the full amount within the agreed interest-free term.

This new generation lay-by was kicked off by Afterpay in 2015, with a few other companies such as ZipPay quickly following suit.

Since then, there has been a significant shift in the way millennials treat money and credit, and this new purchasing option was developed to address that change.

And it has been embraced widely. By early 2018, 1.5 million customers had bought a billion dollars worth of goods using Afterpay, and the numbers continue to climb.

So, how are Afterpay and ZipPay different from the department store interest-free offerings? Well, you receive your funds immediately to make your purchase, limits are lower, and it’s a simple online application (or in person if in-store) that’s done at the time of purchase. And it’s interest free. (More about that later.)

Retailers say they’re offering buy-now-pay-later options to provide choice and convenience to customers. And the customers have spoken, with sales figures for buy-now-pay-later continuing to rise for both online and offline retailers alike. In a tight retail market, some stores fear they are missing out on business if they don’t offer it to their customers.

How do they work?

Afterpay and ZipPay have similar eligibility criteria to use the service.

• You must be 18 and have a valid email address and a debit card or credit card to link to your account (or just a bank account will do, for ZipPay).
• ZipPay also gives you the option of using a valid Facebook or Paypal account instead of an email address. 

Passing the eligibility criteria doesn’t automatically qualify you for ongoing approval. In the case of Afterpay, you’ll be assessed each time you wish to use the service.

While Afterpay does have eligibility criteria, they do not make an enquiry into your credit history or require any proof of income so it could be argued that they do not fully understand whether you are capable of making repayments in full and on time. And even if you do pay in full and on time, these services are not required to pass on your information to the credit reporting bodies, thus you won't be able to build your credit score.

ZipPay, on the other hand, does perform credit checks before offering credit, saying "Our third-party credit checks are performed by Equifax or illion." However, they still do not report positive credit behaviours to the relevant bureaus, so you still can not build credit using ZipPay.

So Afterpay and ZipPay have no positive effect on your credit history, does that mean you're off the hook if you make mistakes and do not pay off the debt? Incorrect.

If you manage to end up with a default worth $150 or more that is more than 60 days overdue then Afterpay or ZipPay will be forced to report it, and you will receive a default notice on your credit report for five years, even after you've paid the debt. So your credit history can only be impacted negatively by using Afterpay and ZipPay.

Afterpay

Afterpay gives customers the option to buy goods or services immediately and then pay for them in four equal instalments due every two weeks. The retailer pays a fee to Afterpay, so there’s no upfront cost to you as a customer. There’s no interest if you miss a payment, but you will be hit with a late fee.

If you’re late with a payment, you’ll be stopped from buying anything else until you’ve paid off your outstanding balance. Late fees start at $10 and are applied as a percentage of what you’ve bought. They’re capped at 25% of the purchase price or $68 (whichever is less).

For new users, Afterpay may limit you to smaller purchases at the start. If you’re looking to use it for a big-ticket item, this could mean you get drawn into using Afterpay for items you can afford to buy outright in order to increase your buying power.

Not everyone is approved for Afterpay, and there’s no guarantee that if you’ve been approved in the past that your next transaction will get the green light. But the longer you’ve been with Afterpay, the more likely you are to be approved. This can be a double-edged sword if your financial situation has changed since you started using the service. Generally speaking, Afterpay has a limit of $500 if your account is linked to a debit card or up to $1,500 if you link to a credit card.

Payments are made automatically from your debit or credit card, with the first payment due two weeks after purchasing the item. You can pay ahead of time if you want, with no penalty for early payment. If your purchase is over $500, the first 25% is due at the time of purchase.

While Afterpay feels like an easy and convenient option, it’s worth remembering that if you don’t make payments, this will get reported on your credit history – and affect your credit score. However, since Afterpay usually doesn’t carry out a credit check before you are approved, simply applying will not affect your credit history.

ZipPay

ZipPay is more like a line of credit. There’s a flexible payment schedule and more time to pay back money borrowed for each purchase.

Customers can choose between weekly, fortnightly or monthly repayment schedules, but there’s a minimum payment of $40 per month. Your balance is interest-free, however, a $7.95 monthly fee applies after 60 days. If you don’t want to pay the monthly fee, you’ll need to pay off your purchase in full by the end of the month you receive your statement.

There’s also a $5 late fee if you don’t make a payment for 21 days (after the initial fee-free period).

You can choose to sign up for direct debit so that payments are taken automatically from your bank account or credit card. But with the fee structure of ZipPay, it’s worth running the numbers to see if you could end up paying the same or more as you would with a credit card. And if you are making repayments from your credit card, you could end up getting hit with fees twice if you’re not transferring money to meet the instalments.

ZipPay has three different credit limit tiers: $350, $500 and $1,000. You’ll be approved for one of these limits at the time of application. If you’re approved for one of the smaller limits, the flat fee for late payments could mean you’re effectively paying a higher rate of interest than customers with a higher ZipPay limit. (And more than you could be paying on a credit card.)

Why do some retailers offer one buy-now-pay-later service over another?

You might wonder why your favourite store chooses one payment option over another. There’s a difference in fees and charges for retailers, and they also need to find the payment option that works best with their point-of-sale (POS) and e-commerce systems.

This could mean you might end up running both types of accounts just to be able to shop at your favourite stores. And this could be difficult to manage.

Which pay-later option is best?

Afterpay and ZipPay are heavily promoted as interest-free, but like most other banking products, it’s important to calculate your interest and fees together to get an accurate picture of the real costs. If you’re regularly incurring late fees when instalments aren’t paid on time, this can equate to an amount far nastier than a high-interest rate. In the case of ZipPay, you can also be liable for account-keeping fees, which can quickly rack up over the months.

If you’re linking your Afterpay or ZipPay account to a credit card, you could find yourself taking a double hit on fees and extending your financial pain if you can’t keep up with repayments.

Is it better to pay with a credit card?

There are significant differences between Afterpay and credit cards.

However, there are several credit card products available that can provide the same convenience at a lower cost, especially if you choose a card with no annual fee and an interest-free period. You also have the added advantage of earning reward points with certain credit cards.

The refund process when you’ve bought an item using a pay-later service takes time, as the retailer will send your refund to Afterpay or ZipPay. They will then reconcile your instalments with the refund before transferring the money to you. When using a credit card for purchases, refunds are generally paid to your credit card on the spot.

Another consideration (with Afterpay in particular) is that you don’t know what limit you are approved for. Their algorithm decides a predetermined spending limit for you, and this can be embarrassing at the point of purchase if you are declined. A credit card gives you certainty on the amount you are approved for and may give you more control over your spending.

It’s also important to consider whether adding a new line of credit or short-term lending to your existing finance arrangements is a good idea. Having too many products can get out of hand, and you’ll need to be a master at money management to keep an eye on it all.

An alternative is to continue using your credit card and set up automatic payments from your savings accounts to your credit card every time you make a purchase you would ordinarily use Afterpay or ZipPay for.

With many large retail brands now also developing their own ‘buy now pay later’ financing to keep it all in-house, you could end up with too many unmanageable accounts. Maybe there needs to be a shift back to simplified spending? Maybe a savings account and a credit card are all we really need.