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Tuesday, 11 December 2018

Afterpay (is not) for dummies

When I first saw Afterpay spring up, I thought it was the dumbest way to scam people into spending money they didnt have. With slogans like "Broke AF but strongly support treating yourself? Afterpay" this was clearly a stupid trap for stupid people. A highly effective trap, but a stupid one nonetheless.

If you don't have money to spare, you sure as heck shouldn't be 'treating yoself'. But then I got to thinking, if you already have the money, and already intend to spend it, is Afterpay any worse than a credit card? Time for a quick review.

First things First, how is Afterpay making money?

At a glance you'd assume that Afterpay is making money from you via fees. In fact, if you're on top of your payments, Afterpay doesn't make a cent from you. Instead, they collect fees from the retailer. (Side note: If you really want to support a business, don't Afterpay with them, you're cutting into their profits)

Afterpay uses an age-old 'debt purchasing' model. When lenders are tired of chasing people for money owed, they can sell that debt to a different, more ruthless company. The original lender will sell your debt for less than you own, recoup most of their money and wash their hands of you. The debt collector then hounds you to make the payments, and collects a small profit.

Afterpay is like that, but friendly, and they do it at point of purchase.

For example, you purchase something for $100. You now owe the retailer $100. This is a debt.

Afterpay purchases that debt from the retailer for $96 (specifically, they charge 30cents, plus 4-6% of the transaction value)

The retailer accepts 4% less for an immediate sale. They're hoping that you'll spend money you wouldn't normally. The retailer would be better off if you paid them directly, but hopefully with the lure of Afterpay you've spent extra to close that gap.
Afterpay then collects $100 from you over 4 payments. They make $4 on the transaction.

The important part is, as long as you don't miss the payments Afterpay isn't going to cost you a dime.

Just like a credit card

In a sense, using Afterpay is just like using a credit card. You walk away with the item, and a debt to be paid later. To use Afterpay well, you need to follow three simple rules: 
  1. Don't spend money you don't have.
  2. Don't spend money you don't have.
  3. Don't. Spend. Money. You. Don't. Have.
Got it? Good. If you are worried about your self control you can set up a secondary account for Afterpay transactions. When you make the purchase, move the required amount of money into the Afterpay account and leave it there.

Using it to your advantage

If you Afterpay something, you get to hold on to your money for a little bit longer. Just like with a credit card, this 'spent, but not gone' money can be placed in an offset account against a much loved mortgage, or a high interest savings account. The money can keep working for you before you make the required payment.

Say you make a $400 payment on your credit card and you don't need to pay the balance until 30 days later. You leave $400 in your offset account for those 30 days, against a 4% home loan. In 30 days, you save 75.6cents off your loan. While it's a small amount, it's free money.

Afterpay works even better, because the payment is stretched over a longer period, 42 days from the first payment to the last. Over 42 days, you accumulate an 88.8cent saving, even accounting for the incremental payments across those 42 days.

Combining these two delayed payment options,  you could take two whole months to pay back that $400, and reap the rewards, including credit card rewards points.

After quickly reviewing the numbers, it turns out that if I make a $400 purchase on the 1st of November with Afterpay, instruct Afterpay to take the money from my credit card, and hold the money in my offset account, I can save $1.578, equivalent to getting a 0.4% discount on my purchase.

Here's how it works:
1st November. Set up a $400 purchase with Afterpay, linked to my credit card. Afterpay immediately takes the first payment of $100.
I owe $300 to Afterpay, $100 on my credit card, and have $400 in my account. 
15th of November. Afterpay takes it's next $100.
I owe Afterpay $200, plus $200 outstanding on my credit card. I have $400 in my account, and in the past two weeks, I've saved 61.4cents. 
29th of December, Afterpay takes another $100.
I owe Afterpaty $100, plus $300 outstanding on my credit card. I still have $400 in my account, and in the month since making my purchase (that I still haven't paid for!) I've reduced the interest on my home loan by $1.227 
1st December, the party starts to die down... I make a payment on my credit card.
I owe Afterpay $100, my credit card balance is zero, and I'm down to $100 in my account. So far I have saved $1.249 worth of interest. 
13th December, Afterpay takes it's final $100
I owe $100 on my credit card, and I'm holding $100 in my account. Savings so far: $1.381 
1st January, I make the final payment.
I owe nothing on my credit card, and I'm not holding any extra money in my offset account. Savings over this period: $1.578

Is it worth it?

I hear you pointing out that I've just built an elaborate system for a measly $1.578 savings. The saving is so small I'm pushing my reported number out to another decimal point. It sounds like a lot of effort for such a minuscule return.

I'm here to tell you it's absolutely worth it.

When I shop online, I typically use PayPal. It used to take me 2-3 minutes to type in my details (forgetting my password a couple of times..), confirm that I was targeting the correct account, and hit 'Go' on the payment.

When I set up my first Afterpay payment, it took me less than 10 minutes, including the screen timing out while I wandered down the other end of the house to find my wallet and pat my cat. Any future payments (assuming I use the same credit card) will take me the same amount of time as logging in to PayPal. Just like that, I had a cat tree on the way for FIRE-cat, and I wasn't making the final payment for two months.

If this was a difficult, laborious task, I'd tell you to throw it away, and just make the damn payment. However, this is money on the table. For a couple of minutes of one-time set up, you can reap the (small) rewards forever more.

But, and I cannot stress this enough, don't spend money you don't have. Afterpay and credit cards are not a way to 'treat yoself' when you're 'broke AF'. These delayed payment tools are tricks that wily spenders can use to get ahead. They are also bear-traps that set you up for failure.

Missing an Afterpay payment will cost you $10, plus another $7 a week until the payment is made, regardless of the transaction size. Thankfully the fees are capped at $68, but a $20 pair of jeans could cost you $88 if you stuff up the payments.

If you've got a good hand on your finances, Afterpay can be an easy way to squeeze that extra bit out of each dollar. If you've got even the slightest concerns about keeping on top of your payments, stay away.

So there you have it, Afterpay (is not) for dummies.


  1. Good article.
    Like credit cards, if they are used wisely can be for your benefit. But the majority don't use it wisely,hence why the products exists and how the provides make money.

    1. For sure - it's worrying how easy it is for people to get in over there heads.

      At the time of writing Afterpay was only pulling a quarter of it's income from late fees. On one hand, only a quarter, on the other hand it means 1 in 4 people aren't making payments - ouch!

      I don't see that lasting though - every bit of research I did for this article showed there's a fairly large amount of scrutiny going on.


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