Have you heard about Afterpay? As your friend, I want to explain exactly how this popular "buy now pay later" service works so you can decide if it meets your shopping and budgeting needs.
What is Afterpay and Why Has it Become So Popular?
Founded in 2014 by Nick Molnar and Anthony Eisen, Afterpay is part of the booming "buy now, pay later" (BNPL) movement making it easier for people to finance purchases without credit cards.
The premise is simple – when checking out at supported retailers, Afterpay lets you split the total cost into 4 interest-free payments collected every 2 weeks. You get the items right away without needing to pay everything upfront or take on debt and interest charges like with traditional financing options.
Afterpay first launched in Australia but has since expanded worldwide with over 16 million global customers today, including 6 million in the US after its 2018 North American debut.
So why has Afterpay struck such a chord, especially with younger demographics? Below are some of the key advantages driving adoption:
- No compounding interest or complex fees – Unlike credit cards that charge ongoing finance charges, Afterpay splits payments across 6 weeks with zero interest. Late fees exist but are capped at lower levels.
- More achievable purchase budgets – Smaller installments make higher ticket items like furniture or electronics more accessible without draining your bank account immediately.
- Easier qualifications – Since Afterpay approvals depend on ability to repay versus credit history, it offers financing to more consumers. Over 1/3 of Afterpay‘s 2020 US customers had no prior credit card.
- Helps reinforce responsible spending habits – The fixed payment reminders and short 6 week term encourage disciplined repayment rather than perpetual debt accumulation.
- Exclusive discounts and perks – Some retailers offer Afterpay-only promotions, cashback rewards, and giveaways for additional savings.
The flexibility and simplicity has appealed to all age groups but especially resonated with Millennials and Gen Z. An impressive 92% of AfterPay app users as of 2022 are under age 45.
How Signing Up Works
Ready to give Afterpay a try for yourself? Registering an account is very quick and easy:
- Download the iOS/Android app or go to www.afterpay.com
- Tap "Create Account" and enter your email, phone number, name, date of birth
- Read and accept the terms & conditions
- Link your debit or credit card
Afterpay will perform an eligibility check when you link your card. This is NOT the same as a formal credit check so it won‘t negatively impact your credit score. Still, they do validating things like:
- Confirming details provided match your bank card information
- Checking for previous issues with payment defaults or Afterpay delinquencies
- Running your name against public records and data broker databases
As long as everything looks good, you‘ll quickly receive account approval! Limits start around $300 for first-timers and grow over time with reliable order and payment history.
Once set up, simply shop at any of the 100,000+ stores that accept Afterpay and select it at online checkout or provide your phone number in-person.
How Afterpay‘s Installments and Payment Schedule Works
The seamless experience and lack of complex financing terms is another reason Afterpay stands out from credit cards.
Transactions always split into 4 equal installments collected every 2 weeks:
- Initial payment: 25% of total order due immediately
- 2 weeks later: 25% of remaining balance
- 4 weeks later: 25% of remaining balance
- 6 weeks later: Final 25% payment
You‘ll receive email and app reminders as each due date approaches. When the final installment processes, your purchase is completely paid off!
This predictable, short-term structure makes it simpler to budget compared to varying monthly credit card statements.
Afterpay also enforces reasonable purchase limits based on your order history:
Afterpay Limits By Payment Cycle
1-4 Orders: Up to $300
5-9 Orders: Up to $800
10+ Orders: Up to $1500
Notes:
- Limits refresh after full repayment
- Max total unpaid balance across orders = $2000How Afterpay Makes Money
You might be wondering how Afterpay turns a profit when they don‘t charge consumers fees or interest. The business model is actually more B2B focused.
Whenever a shopper completes an installment plan, Afterpay charges the retailer a 3-6% transaction fee. These merchant fees now generate over 90% of total company revenue.
In a way, stores are essentially paying for the right to offer Afterpay‘s BNPL service as an added payment option. They view it as worthwhile to boost conversion rates and order sizes since more customers can afford larger, higher-margin purchases.
The Costs, Risks, and Credit Impacts Associated with Afterpay
With the benefits also come some responsibilities – both for consumers and Afterpay itself which faces financial losses when accounts default. Let‘s explore these considerations more closely.
Fees and Interest Charges
The main fees to keep in mind are late payment charges:
Afterpay Late Fee Schedule
1st missed payment - $10
2nd missed payment - Additional $7
Further missed payments - $7 per incident
Max fees per order = 25% of purchase price So long as you pay on time, Afterpay is completely free outside of the amount you originally agreed to for your purchases. Remember, it simply breaks total checkout costs into installments versus extending new credit.
However, don‘t underestimate the damage late fees present. If you maxed out an order 25% cap at $1,000, failing to repay could result in ~$250 of fees alone!
Potential Credit Impacts
Missed installments can potentially harm your credit rating in a couple ways:
- Afterpay may report seriously late delinquent accounts to credit bureaus
- Overdue debts could proceed to collections and court judgements
However, when used properly, Afterpay generally does not impact your score. They don‘t do hard credit checks which would inquire into your history during sign-ups. Just be diligent about paying on time.
The Overspending Risk
Personal finance experts also warn how easy access to installment financing could lure some customers into overspending. When payments break into smaller chunks, it‘s harder to conceptualize your true expense burden.
"The short-term incentives BNPL offers should be balanced carefully against long-term risks," said Ryan Sandler, a financial advisor. "Only use Afterpay for reasonable purchases well within your budget."
Think carefully about each order and ask yourself:
- "Will this negatively impact my ability to afford other essentials like rent and utilities?"
- "Am I still on track to meet my savings goals after adding this new expense?"
How Returns and Refunds Work
Luckily, returns and exchanges with Afterpay follow the standard retailer-set policies you‘re used to.
Start by initializing the return through normal store channels – online, in-person, via mail etc. Afterpay has no control over item availability, quality, delivery, or logistics.
Once the merchant verifies and processes everything their side, your refund will issue based on the total amount you already paid off using installments:
- Full refunds – If you return order shortly after purchasing or already paid in full, the total transaction amount refunds to your original payment card
- Partial refunds – If you still owe additional installment payments, your account balance decreases starting from your next due date forward
It‘s as simple as that! Just don‘t stop making normally scheduled payments until seeing credits appear or you risk late fees. Expect funds back within 5-7 business days once issuance confirmed.
Afterpay vs Other Major BNPL Providers
While Afterpay kickstarted the global buy now pay later trend, new competitors like Affirm, Klarna, QuadPay and Sezzle offer similar installment services:
BNPL Provider Comparison
Company | Typical APR | Late Fees | International Presence
Afterpay | 0% | Up to 25% of purchase | UK, Canada, Australia, NZ, US
Affirm | 0-30% | Up to $15-38 per missed payment | US, Canada
Klarna | 0% | Up to $7 per statement issued | Europe, US, Australia
QuadPay | 0% | $9 for each missed installment | US, Canada, Australia
Sezzle | 0% | Up to $15-40 depending on order total | US, Canada, Europe The core value propositions around interest-free installments, predictable repayment schedules, and minimal eligibility requirements remain fairly consistent.
However, certain providers offer additional features like:
- Interest on longer 6+ month terms (Affirm)
- Bill pay capabilities (Klarna)
- Cashback rewards (QuadPay)
I suggest comparing the apps and specific merchant offerings to determine the right match for your spending habits!
The Bottom Line – Is Afterpay Worth Using?
At the end of the day, BNPL platforms like Afterpay remove much of the complexity and commitment associated with financing purchases traditionally.
Installment calculations happen automatically. There‘s no headaches managing statements or repaying ballooning credit card balances as high-interest debt accumulates. If your budget allows room for scheduled installments and you pay diligently to avoid fees, embracing Afterpay sparingly could unlock savings and convenience.
However, it always makes sense to exercise financial prudence and caution with tools like this. Avoid temptation to overspend just because repayments split into smaller chunks or stretch timelines longer than your income buffer reasonably permits. Take time to carefully evaluate larger purchases against savings goals before proceeding.
Within sensible limits though, services like Afterpay offer a refreshing way to responsibly assume costs over time. Completing payments as expected also helps strengthen your credit standing for bigger future loans like mortgages.
Let me know if any part of how Afterpay functions remains unclear! I‘m always happy to help explain financial topics in more detail as a friend.
