How Does Buying Now Pay Later (BNPL) Work?
Home > Banking > How Does Buying Now Pay Later (BNPL) Work?

How Does Buying Now Pay Later (BNPL) Work?

Nora Ackermann

Nora Ackermann

07/10/2020 • 6 minute read

The Oiyo team works hard to ensure the quality and accuracy of our articles. Learn about our editorial process.

Quality Checked

On this page:

Unpacking BNPL

Looking at signing up for a buy now pay later service? We’ve put together this helpful guide to help you. Since COVID restrictions hit Australia, contactless payment has been the way to go. Additionally, BNPL options increased by 22% since the pandemic started. The appeal of BNPL is that it allows you to split the cost of your purchase into multiple smaller payments. Buy now pay later is a safe way of spending and will cost you less than paying interest on a credit card balance. In fact, with most providers, you won’t pay any extra costs.

So, let’s dive into the world of BNPL services and see just what all the fuss is about!

What is buy now pay later in Australia?

If you want to buy something but don’t want to pay the full price straight away, buy now pay later is the way to go. It allows you to split the full price into several smaller payments that are often interest-free. It works like an instalment loan but most providers won’t charge you extra for it. In short, it helps you keep your money in your bank account longer at no extra charge. Zip and Afterpay are the most popular providers in Australia, however, there are multiple other options available.

Like a credit card, your buy now pay later account will have a set limit and you won’t be able to spend more than that limit. To set up a buy now pay later account, the shop where you are buying from has to offer it as a payment method. To make sure you won’t miss a payment, the account will be linked to your debit or credit card. Once set up, you will receive a payment reminder and can set up autopay, so you never miss a bill again.

What can you purchase with BNPL?

Buy now pay later isn’t limited to a specific product or service. Most retailers offer the option to defer or split your payment, whereas medical providers, like dentists and GPS, offer options to split the costs over time. In most cases, BNPL isn’t limited by the products you can purchase but by the amount you can spend. Depending on your provider, you can use their services to finance products up to a few thousand dollars.

How does BNPL work?

Buy now pay later services are basically the same as a small instalment loan. When setting up your account, your provider will ask you a few questions about you and your financial situation.

They will perform a credit check to ensure that you don’t have a negative financial history and then you are good to go. You can choose to finance products and services up to a certain limit set by your provider. Until then, you can make multiple purchases at the same time and possibly combine the repayments on all purchases. This gives you more flexibility when making bigger investments and helps you spread out payments over time.

Is BNPL safe to use?

It certainly is. Buy now pay later companies will validate your identity and perform a quick credit check before allowing you to make a purchase. However, they won’t check your bank account. If you’re not careful, you might end up with multiple BNPL accounts that have accumulated a fair amount of repayments. To be on the safe side, you should preferably pick one provider and stick with them to stay on top of your spending.

How BNPL affects your credit scores

When setting up your BNPL account, buy now pay later companies will perform a credit check. There are two different types of credit checks, so-called soft checks and hard checks. Soft checks won’t affect your credit rating and won’t be visible in your credit history. In this case, the provider will use the soft check to validate your identity and have a look at your current credit score. If everything looks fine, your account will be approved and you can start spending.

Other providers will perform a so-called hard check. This means they send a request to check your creditworthiness to the credit bureau which leaves a mark on your credit report and might lower your credit score. A hard check will often be performed if your credit score allows you to borrow large sums of money. You should check upfront what sort of credit check a company performs if you are worried it may affect your credit score.

BNPL providers that conduct hard credit checks

*Please note, the information shown in the following table reflects the current information offered by financial providers. Ensure you check upfront with your BNPL provider to further understand if their product meets your needs.

Provider Do They Conduct a Hard Credit Check?
Zip Pay Yes
Zip Money Yes
AfterPay No, but they have the right to ask for your credit report.
Humm No
OpenPay Yes
SplitIt No
Klarna No
Shortcode Icon

Something to note

Missed payments on your buy now pay later accounts will have a negative impact on your credit scores. If it turns into default, this entry will stay on your credit score for years and may affect your ability to borrow in the future. Therefore, it’s very important to spend responsibly.

Spending responsibly with buy now pay later

Using services like BNPL can help you split bigger payments into smaller chunks that work better with your personal budget. However, it can change the way you are spending your money and if you don’t take care, it can get you in trouble.

It’s easy to make a purchase of $500 and only think about the first instalment of $125. Shortsighted thinking could have you believe that $125 is an affordable amount in the short term, however, the same payment will have to be repaid in three more instalments. Missed or late payments can cause unnecessary fees and may even damage your credit scores in the long run. To avoid overspending, you can stick to a few simple rules.

  • Have a spending budget. It’s easy to forget your BNPL payments when setting up a budget. Make sure you include them in your spending budget, especially if they are recurring payments over a few weeks.
  • Set up autopay and never forget a payment again. While BNPL is easy and convenient, it’s as easy to forget a payment. By setting up autopay, you can avoid unnecessary stress and skip the penalty fees.
  • Don’t open multiple BNPL accounts. It’s easy to lose track of your spendings when using more than one buy now pay later account. Many providers offer instalment schemes that let you split your payments, however, sticking to one will make it easier to stay on top of your payments.
  • Read the small print. Not all services are the same. Some BNPL services may come with additional costs and fees. Make sure that you read the terms and conditions and that you know what you are signing up for.
  • Link your account to your debit, not your credit card. Most likely, you have chosen BNPL because it’s cheaper than buying an item on your credit card. It would be ironic to then link it to your credit card and risk paying interest on your overdraw limits.
Shortcode Icon

Oiyo's two cents

BNPL services can be a great resource if you stay on top of your payments and don’t spend beyond your means. It's important to stay savvy with your spending and seek professional advice if you're ever unsure of a financial product!

Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.


Join our mailing list

Stay up to date with Oiyo’s financial tips and take control of your finances.

Finance can vary from state to state, so we ask for yours to ensure we're providing the right info.


Nora Ackermann

Written by Nora Ackermann

Nora Ackerman is a contributing writer at Oiyo, specialising in personal credit. Nora originates from Germany and holds a Bachelor of Arts from Karlsruhe Institute of Technology and a Master of Arts from the Humboldt University of Berlin. She has extensive experience across the communications and journalism sectors, with her work being published in a number of German publications.

More about Nora Ackermann