Long Property

Article by Patrick Lynch, Head of Operations

‘Cash is King’ is one of the most common finance phrases.  Recently, that has been less true when it comes to day-to-day purchases, with fewer transactions using cash (or occurring face-to-face – particularly during these COVID19 times).  There has been significant growth in the use of ‘Buy now, Pay Later’.  Let’s have a look at these payment methods:

• Buy Now Pay Later
• Credit Cards
• Debit Cards
• New ‘No Interest’/ ‘Interest-fee’ Credit Cards
• Personal Loans or Equity Releases

Interest-free finance, aka Buy Now Pay Later services like Afterpay and Zip Pay, have experienced substantial growth in usage (and in share price).  Some of the larger financial institutions are shareholders in these platforms and/ or have launched their own alternatives to the big players.

These platforms allow you to spread the cost of a purchase over time without having to pay interest, like traditional retailers have offered.  Credit approval tends to be quick and easy (compared with e.g. a credit card), and you make regular periodic repayments.  Retailers benefit as it allows immediate and (often) unplanned spending, although they pay a fee to the service provider.

Consumers have to be careful – recent research has suggested that many users found themselves in financial difficulty as it is easy to rack-up debt.  Fees are charged for late payments or other events (e.g. limit availability).  Some retailers are only signed up to limited platforms, so you might need multiple services – making it easy to lose track of spending (and repayments).  They can also negatively affect future borrowing capacity.  So read the T&Cs, set spending limits, avoid impulse purchases and stop if it is getting too much to handle.

Credit cards have tended to be the most common payment method, after cash, and have some great benefits.  They offer security for loss of card (cash tends to disappear) and fraud prevention.  Purchases can be interest-free, so long as the balance is repaid in full before the period ends.  Many cards come with the ability to earn points for spending, redeemable for perks including flights, etc.

There are some notable disadvantages.  Interest rates can be high (20%, or more for cash advances) if you don’t repay in full each month.  There are charges for missed payments, being over limit, overseas transactions, surcharges at retailers, annual fees, rewards fees, etc.  Limits affect borrowing capacity and missed payments can damage your credit record.  Credit card interest rates haven’t fallen in line with the RBA rate cuts or home loans – the price for risk has increased.

Many consumers now use Debit cards (or a low rate credit card), which don’t come with the same benefits.  A Debit Card is effectively cash, as it can only be used if there are funds available in the account (either through withdrawal at ATMs or when purchasing through ‘tap and go’, online, etc.).

To compete against the Buy Now Pay Later platforms, as well as the reduced use of credit cards, two of the Big 4 Banks have launched No Interest Cards – CBA (Neo) and NAB (StraightUp).

These cards require the user to pay a flat monthly fee – but only when the card is used: if there is NIL balance, there is NIL fee.  There are credit limits and minimum repayment amounts, and these cards appear to be compatible with contactless options like Apply Pay, Google Pay, etc.  Given they have only launched, competing against Buy Now Pay Later, caution might be appropriate.

A final option – particularly for larger items of expenditure – is a personal loan or equity release.  Fixed rate personal loans are most common when purchasing a car, often with rates of up to 10% and a balloon payment at the end (which sometime can be rolled over into another loan or when upgrading/ updating the car).  As well as interest, there can be monthly and early repayment fees.

Some clients use the equity in their home to secure a cheaper rate; the trick is to repay the loan in the same timeframe as the usefulness of the asset (e.g. 5 years), so the overall interest cost doesn’t end up higher (e.g. over a 30-year term).

Closing

This could be the end of credit cards and cash as the predominant methods of paying for day-to-day transactions.  There are advantages to avoiding debt when it comes to borrowing capacity, never mind control of spending.  The new payment methods appear to be here to stay – control is key.