Why buy now pay later is a loan, not a payment plan

Category: Banking & credit
Contexts: Buying clothes online, Buying a large appliance, Getting a credit card
Reading time: 4 minutes · Published

What it is

A short-term consumer loan that splits a purchase into 4 payments. It looks like a payment plan. Legally and financially, it is credit. From 10 June 2025, buy now pay later is regulated in Australia as a low-cost credit contract under the National Consumer Credit Protection Amendment Act 2024.

Where you will see it

Checkout pages of online clothing stores, electronics retailers and many physical shops. Always offered right before you pay. The button is usually larger and more colourful than the regular checkout.

What the regulators say

ASIC Report 672 found that 55 per cent of buy now pay later users spend more than they otherwise would. 21 per cent missed a payment in the past year. One in five went without essentials, including meals, to make a repayment. The Hayne Royal Commission and successive Treasury reviews flagged the sector as a credit product hiding behind payment-plan branding.

How they trap you

They say
Pay in four. No interest. Just split it.
It is actually
A loan that makes spending feel painless.
What to do
If you cannot afford the full price now, you cannot afford it in four payments.

The story

Lucy sees a $200 jacket online. The checkout offers 4 payments of $50, no interest. She would never have spent $200 on a jacket in one go. The split makes it feel like $50. She buys. Two weeks later, three more $50 payments are scheduled. She did not budget for them. She misses one, gets a $10 late fee. The next one is delayed too. The $200 jacket costs her $230.

Frequently asked questions

Is buy now pay later actually free?
No. It is free only if you make every payment on time. Miss one and you pay late fees. Some providers also charge account-keeping or rescheduling fees.
Does buy now pay later affect my credit score?
In Australia, yes. Since 2024, major providers report payment history to credit bureaus. Missed payments can lower your score and affect your ability to get a home loan.
Is buy now pay later regulated in Australia?
Yes. From 10 June 2025, BNPL is regulated as a low-cost credit contract under the National Consumer Credit Protection Amendment Act 2024. Providers must hold a credit licence and assess if the loan is suitable for you.
What happens if I miss a buy now pay later payment?
You get charged a late fee, often $10. If the next payment fails too, more fees stack up. The provider can block your account and report the missed payment to credit bureaus.
Why does buy now pay later make me spend more?
Splitting a price into four smaller amounts reduces the pain of paying. Your brain processes $50 as smaller than $200, even though the total cost is the same. ASIC found this is exactly why BNPL users spend more than they would with a normal card.

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Paying the minimum on a $5,000 credit card balance can cost you $11,000 in interest over 20 years. Here is how the trap works and what to do.

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About the author

Enrico Scha spent 25 years inside the design industry that creates the patterns documented on this site. After leaving in 2025, he writes about how the patterns work so consumers can spot them in 10 seconds, not after the money is gone.

Former 25-year insider in the design industry that creates these patterns

Sources