Blog How do pay-later schemes affect your home loan application?

How do pay-later schemes affect your home loan application?

20 March 2020

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Buy now, pay later (BNPL) platforms like Afterpay and Klarna have taken the country by storm in recent years, but they’ve also started raising questions among home lenders and home buyers alike. While these platforms can provide some benefits - mainly structured, interest-free repayments and budgeting capabilities - they can also negatively affect your home loan application.

The payments landscape in Australia is rapidly changing, with nearly 2 million people using these platforms in the year to September 2019, according to Roy Morgan. Those in the 25-34 age range make up over a third of BNPL customers - an age range ripe for entering the housing market.

But using these services too much could harm your home loan application.

BNPL Breakdown

Breakdown of BNPL usage by age. Source: Roy Morgan.

How buy now, pay later can affect your home loan application

Simply using buy now, pay later platforms won’t instantly get you rejected for a home loan, despite what you might have heard. However, there are some ways that buy now, pay later usage can set you back and make it harder to get approval, and there are some circumstances where it can lead to rejection.

They can damage your credit score

Lenders will look at BNPL platforms like they look at a credit card, even though they aren’t credit cards as most of them don’t charge interest and charge in instalments. Every lender will complete a credit check on a potential borrower, and your BNPL spending can sometimes affect your credit score.

Most BNPL providers except for Afterpay and Bundll do credit checks when you signup, which means missed repayments and defaults will negatively affect your credit score. And, according to Afterpay’s T’s and C’s, it can also report “negative activity … (including late payments, missed payments, defaults or chargebacks)” to the credit reporting agencies.

Too many enquiries on a credit file or too low a score can cause a lender to reject your application.

They can affect how lenders view your expenses

Lenders always look at an applicant’s incoming and outgoing money to see what they spend their money on and how frequently they spend it. And buy now, pay later expenses are one thing they’ll look out for.

Having $0 in a bank account but five or six different BNPL repayments on the go will cast serious doubt over your financial prudence. Lenders prefer someone with a good amount of money in their bank accounts and in investments, and buying too many shoes or video games with BNPL could be viewed the same as other negative things like gambling.

Your repayment ability

Above all, lenders will assess your expected ability to service the loan, i.e comfortably meet your repayments. If you don’t overuse these services and regularly make your repayments on time then it shouldn’t be a problem, as long as you disclose how often you use them.

If a lender calculates that you won’t meet the home loan’s repayments, you won’t be approved, and they will factor in extra BNPL debts into their calculations, just as they would with other debts like loans or credit cards.

Use our home loan calculator to work out what you can afford to repay.

Applying for a home loan with buy now, pay later

Using buy now, pay later schemes can make things slightly more complicated, just as other debts and obligations like credit cards can. If you use BNPL schemes, make sure you do the following before and during a home loan application:

  • Limit how much you use them - use your own cash or a debit card when you can

  • Don’t have too many of them open - make sure you only use a few at most

  • Make sure you don’t have any outstanding buy now, pay later debt. Pay off any and all late payments.

  • If you do have missed payments, don’t make any other BNPL purchases until your debts are settled

  • And above all, ensure you disclose any BNPL accounts and missed payments/late fees to your lender

Save now, pay later instead

Instead of buy now, pay later, try save now pay later, which is the tried and tested method of saving money on a regular basis and using that money for purchases instead of credit. Not only is this more financially sound, you can also impress a lender by displaying three to six month's worth of genuine savings, which can boost your chances of loan approval.

Check out some of loans.com.au’s home loans to get your application started.