Afterpay is a trendy way to finance everything from $5 lip gloss to $800 dressers. You may have seen this message at checkout: “Your total is $80, or 4 interest-free installments of $20 through Afterpay”. Tempting, right? After all, why would I pay $80 now, when I can instead pay $20 and worry about the rest later?

This delayed payment and procrastinatory mindset is a dangerous habit to fall into. All is well and good when incomes and expenses are predictable and regular, but they aren’t. Your finances can change quite rapidly; unexpected expenses and emergencies happen, pandemics happen.

Let’s start with an example: say you have $100 budgeted each month toward clothes, shoes and other items. Someone using Afterpay to spend this $100 could end up spending a total of $400, paying $100 at once and the rest of the $300 over the coming weeks.

What’s the issue? Well, now you’ve actually spent four times the amount you can afford and have tied yourself down to additional $100 payments. You also have to find another $100 in time to avoid late fees. See the problem? Rather than gaining financial freedom, you’re handing it over to Afterpay.

Afterpay has a very convincing website, including pictures of happy, young people and a “How It Works” page that conveniently fails to mention any details about fees. There’s encouraging statements in large, bolded text that read “Go after it,” and “A service in service of you.”

I find a lot of irony in its mission statement: “We believe everyone has the right to financial freedom, transparency and a fairer future.” While being committed to “financial freedom,” Afterpay’s entire business model is centered around putting people in what is essentially interest-free debt. Not to mention the “transparency” of its fees is limited to the fine print in its cryptic installment agreement.

While I disagree with the financial behaviors Afterpay promotes, I can understand its practical uses. As I mentioned earlier, emergencies happen. In these cases, interest-free installments might be your best and only option. Here’s a couple of helpful tips to keep yourself on track to avoid late-fees:

• Use a debit card. Keeping track of your payments through a credit card can get complicated and dangerous because of high-interest rates on credit card payments if you don’t pay on time.
• Set reminders when payments are due. Life gets busy, and setting reminders will help you ensure that you have the necessary amount in your bank account to cover the upcoming payment.
• Keep a clear and organized budget. Think about it this way: if everything you’re buying now was 75% off, you’d probably be buying a lot more. Therein lies the problem with delayed payments: overspending and finding yourself in trouble later is very easy.
• Don’t use Afterpay as a budgeting tool. The “Key Facts” sheet published on its website states that 77% of customers use Afterpay for budgeting purposes. Let’s be clear about what Afterpay really is: It is a for-profit company that loans you money for nonessentials and allows you to pay it back in four interest-free payments.
• Understand Afterpay’s fee policy. You are contractually obligated to pay back any money that you owe the company, according to the installment agreement. If your payment is over 10 days late, you will be charged $8. It is unclear if the $8 is a one-time fee or a recurring one that you’ll collect if you continue to miss payments.
• Even though signing up for Afterpay doesn’t require a credit check and using the service won’t go toward your credit, the company reserves the right to make third-party inquiries into your credit report if there are negative balances on your account. Having a lot of credit inquiries on your record can negatively impact your credit score.

Don’t be fooled by Afterpay’s extremely effective marketing. Even though the company is telling you it’s a great option, only you know yourself and your finances best. When prompted to use Afterpay at checkout, make an informed decision on if it’s appropriate for your purchase. If you’re looking to finance a $40 shirt, odds are you shouldn’t be buying that shirt to begin with.

Andrea Lan is a junior finance major. She is a Smart Money coach in the Office of Financial Literacy. Her column appears bi-weekly. She can be reached at [email protected].

 

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Published on September 16, 2020 at 9:16 pm