September 28th 2024.
According to a financial expert, Australians who are struggling with mounting debt are increasingly turning to buy now, pay later (BNPL) products like Afterpay. However, simply implementing a self-imposed spending cap may not be enough to deter people in financial difficulty from using BNPL as a line of credit.
David Grafton, a financial consultant and honorary associate at the University of Sydney Business School, believes that a voluntary spending cap set by the user may not be effective for those who desperately need cash and can easily opt for unregulated lines of credit. He also points out that products like Afterpay are too easy to sign up for and access, making it difficult for people to resist the temptation to spend beyond their means.
While every Afterpay customer starts with a limit of $600, this amount can increase gradually based on their spending behavior. While a self-imposed cap may work for those in a stable financial position, it may not be enough for those facing financial stress.
Grafton emphasizes the urgent need for regulation in the BNPL space, especially since these products are not currently regulated like other lenders in Australia. He believes that the government should impose regulations similar to those governing responsible lending to protect consumers from falling into debt traps.
One of the main concerns with BNPL products is that they do not offer the same hardship relief options as traditional lenders. This has led to cases where people prioritize their BNPL debt over other household bills, such as mortgages. Grafton's research at Sydney University has found evidence of this happening, with people fulfilling their BNPL commitments while neglecting other financial obligations.
His study also found that consumers who are maxed out on their credit cards are 2.1 times more likely to hold multiple BNPL accounts, which is a clear sign of financial stress. Grafton believes that this stress is exacerbated by the easy access to BNPL products and emphasizes the importance of financial literacy in helping people avoid mounting debt.
Afterpay, which has millions of users in Australia, has stated that it would welcome regulation. The company believes that regulations should enhance customer protections while also supporting innovation and competition. It also offers a hardship program for customers who may need more flexible payment timelines. In the end, while regulation may help, it is also crucial for individuals to educate themselves about financial literacy to avoid getting into debt traps.
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