It’s been a rough start to the year for the share prices of buy now, pay later (BNPL) companies.

A single share in Afterpay was hovering around $100 late last year but is now sitting closer to $40.

Similarly, a single share in Zip was sitting at $7 late last year but is now circa $2.50.

So, if they’ve done so well in the past why are the values down now?

There are many factors that influence share prices. One reason for the recent fall in value of these stocks is the Australian Government announcing late last year that there would be increased regulation of the sector in 2022. 

What many don’t realise is that BNPL services are effectively a form of credit and as such regulations need to be put in place to protect consumers from taking on debts they can’t afford to repay as well as ensuring all the terms and conditions of financial products are explained clearly.

BNPLs say they don’t charge interest. In Afterpay’s case instead, users are charged a 25% late fee if payments aren’t made on time, and there are plenty of those, with it charging $35 million in late fees last year – around 10% of its total revenue.

Credit cards charge interest at 20% per annum and according to a debt recovery company Illion, there are 14.8 million credit cards in use throughout Australia which earned banks more than $6 billion in interest in 2019.

The same report found that 10,000 bankrupt Australians had been issued a credit card, and 300,000 Australians received credit cards despite defaulting on other debts. 

So, imagine the possibilities for an industry like BNPL that isn’t subject to the scrutiny and accountability of our banking sector. You can see why the value of these companies had grown so astronomically in a short period of time. But it also illustrates why the industry needs regulation.

So why is this all important when talking about investing?

Well, your debts and how you pay them are of vital interest to banks, and most people need to use banks to grow their wealth.

I’ve never used BNPL but I am one of the 14.8 million Australians who have a credit card. In fact, I have had a credit card for ten years and this week decided to close it. 

When I signed up for it, it was marketed as a way to pay for things and get 60 days to pay it back. If I paid the money back within 60 days, I wouldn’t get charged any interest. Sound familiar?

I have been telling myself that, despite some early lessons learned the hard way, these days I hardly ever use it and always clear the balance at the end of each month. 

A quick audit showed I’d actually chalked up $70 in interest payments on the card in the past two years. 

Ok, so most of the time I clear the balance at the end of the month… while it’s not huge money, it’s $70 I would have preferred in my pocket.

It’s not the main reason I closed the card, though. The main reason I closed the card was because of its impact on my borrowing capacity. 

I’ve been speaking with my broker about my borrowing capacity and I asked if closing my credit card would have an impact.

It would to the tune of $50,000.

Decision made.

I’m not saying everyone should close their credit cards but it’s a worthwhile exercise to check how much interest you’ve paid in the past year or two.

The biggest thing to consider is what impact a credit card and potentially BNPL services are having on your borrowing capacity.

Banks can already see what repayments you are making to BNPL schemes when assessing your expenses when you apply for a loan. It’s only a matter of time before those services follow the same path as credit cards and have a significant impact on our ability to borrow money.

My advice is to be careful when it comes to credit cards and BNPL services and limit your use of them where possible. It can have a big impact on your ability to borrow and build wealth.

 

 

 

 

Refinancing – worth it?

Q – I am considering refinancing my home loan to another bank and wondered what the pros and cons are for doing so. Is it as simple as trying to get the best rate?



A – Thanks for this question and good on you for taking the initiative.

When it comes to refinancing, there’s a few things to consider. The first (and most common) reason you might refinance is, like you mention, the ability to get a better interest rate. 

Make sure you also consider the bank’s fees. Most banks charge upfront application fees, as well as annual fees. It’s important to consider interest rates and fees at the same time, because there’s no use paying a lower interest rate if the higher fees leave you in a net worse position.

You could also seek to refinance because another bank has a better servicing calculator which qualifies you to borrow more money from that bank.

The final thing to take into account is the term of the loan. The longer the term, the lower the repayments. Inversely, the shorter the term the higher the repayments (albeit you end up paying less interest over the lifetime of the loan).

For future reference, if it is an investment loan, you might weigh up principal and interest versus interest only repayment terms. 

They’re main thing to do is take the emotion out of the decision. Banks are a business at the end of the day, so you have to treat the relationship that way.

 

James Fitzgerald
Author, BULLETPROOF INVESTING