AfterPay Review - How Does Afterpay Work?

Afterpay has taken New Zealand by storm since its arrival in September 2017, although by 2022 it has become less popular than its first launch. Afterpay offers interest-free terms and an 8 week repayment period, the payment method is primarily offered by clothing retailers, lifestyle products and Trade Me. 

But, is it a good deal, and should you use it?
We've put together a guide to Afterpay to explain how the payment method works, the benefits and pitfalls of using it, a comparison to credit cards and store cards, as well as essential 'must-know' facts and tips for using Afterpay effectively. 

Our guide covers:

• How does Afterpay work, and where can I use it?
• Who is Afterpay for?
• Why do so many retailers offer Afterpay?
• Afterpay vs Credit Cards and Store Cards
• Afterpay - 10 Must Know Facts
• ​Tips for making the most out of Afterpay
• Conclusion

Know this first - understand the late fees per purchase
If you don’t have sufficient funds to make a payment and you miss a repayment on the day its due, you will be charged:

1. For each order below $40, a maximum of one $10 late fee may be applied per order.
2. For each order of $40 or above, the total of the late fees that may be applied are capped at 25% of the original order value or $68, whichever is less. 

Signing Up and Getting Approved
Sign up is online-only, and applicants need to satisfy a few criteria: 

• Be at least 18 years old
• Have a valid and verifiable email address and mobile
• Have a debit card or credit card
• Capable of entering into a legally binding contract 
• Live in New Zealand
• Have a verifiable ID (passport, driver licence etc)

Retailers
Retailers are both in-store and online, with the majority being in the fashion industry. Examples include Kathmandu, Country Road, Sunglass Hut, Michael Hill, Hallenstein Brothers, and 200+ other retailers. 

Making a Purchase
Afterpay offers two ways to make a purchase:

1. On the Afterpay app (used in-store): The Afterpay app lets you search for a physical retailer that you can use Afterpay in-store to purchase items with. The app will generate a barcode.; this barcode will indicate the maximum amount you can spend in the store, for example, ‘$180.00’. You can then visit the store and purchase goods or services up to the maximum value stated.
2. Online: Participating retailers will indicate they offer Afterpay on their website and the repayment amounts for your basket of items should you purchase them. 

Once you have decided on your purchase, you will need to pay 25% of the value of the items or service upfront, and this will paid via the debit or credit card loaded on your Afterpay account. You'll then be shown a repayment schedule, which requires three further 25% payments over six weeks, i.e. one every fortnight.

Repayments and Reminders
Afterpay only accepts Mastercard and Visa credit and debit cards, but these MUST have been issued by a New Zealand bank. Afterpay does not accept bank transfers, automatic payments or direct debits. 

You can find the scheduled payment dates on the purchase confirmation email which is sent when an order is approved. If you don’t have the email, logging in to the Afterpay website will show the details. 

Afterpay send a series of reminders so that you make sure there's money in your account for the direct debit to clear. With regular payments, there is a clear, set, standard and achievable endpoint – in just 6 weeks and your purchases can be paid for. Contrast this to a credit card which rolls over with a 2%-5% minimum repayment.

Payment will automatically be taken from your preferred card on the scheduled payment date, and if this card fails, any other card you have stored the details of will be charged. If this fails, a late fee will be applied (see below). 
If you want to make a payment before the due date, you can do this manually via the website or app. You can make as many early repayments as you want, and if they are successful, the automatic payment will no longer be processed on the original scheduled date.

Late Fees and Outstanding Balance Penalties
If you don’t have sufficient funds to make a payment and you miss a repayment on the day its due, you will be charged:

1. For each order below $40, a maximum of one $10 late fee may be applied per order.
2. For each order of $40 or above, the total of the late fees that may be applied are capped at 25% of the original order value or $68, whichever is less. 

​Source: Afterpay Terms of Service

Returns, Refunds and Repayment Adjustments
Returns depend on the individual retailer's return policy; essentially returning an item and getting a refund through Afterpay is the same as any other refund and it will be processed back on your debit or credit card. 

• You will never get a cash refund on Afterpay
• Either the payments you have already been paid will be refunded in full, or your payment schedule will adjust if you have exchanged an item to a smaller value to reflect the new payment amounts (explained in detail below). 

While your rights are protected, Afterpay's process drip-feeds refunds
You have the same consumer rights to return items no matter how you paid for them. If you decide to return one item or the entire purchase, once the retailer has accepted your returns, your Afterpay payment plan is adjusted to reflect the new total order value. But it's important to know that in the case of a partial refund first Afterpay will cancel/reduce any future payments then refund you payments made:

1. If you have already made a payment or two, your repayment schedule will adjust accordingly.
2. However, your fortnightly repayments won’t necessarily be refunded - instead, you may see the payment due next is still at full value, while the final payment(s) reduces to $0.
3. If you were due a full refund, as soon as the retailer accepts your return it can take up to 5-7 business days for the money to show up on your account (this depends on the processing time of your bank which credits the funds to your card - Afterpay will refund the money to your card immediately).

You may be declined from making purchases at any time
Just because you have an Afterpay account doesn't mean you can buy whatever you want. Thousands of transactions are declined every week, which may be due to:

• You will be declined if you do not have 25% of purchase price in your account
• If your card details are incorrect
• If you have late fees outstanding-  if this is the case, you cannot keep using Afterpay
• ​The length of time you have been using Afterpay - new purchase approvals are much tighter in the first 6 weeks
• The total number of orders and/or the outstanding amount you have to repay - Afterpay states it can help to make some early repayments
• The value of the order you are trying to place - Afterpay suggests that reducing the value of your shopping cart can help, but it’s not a guarantee

We see Afterpay as an easy way for the non-financially minded to buy things without getting trapped in long-term credit card debt. However, a growing number of young people are adverse to credit cards and store finance, meaning Afterpay could provide an alternative short-term credit solution that doesn't aggressively leave customers in debt.

Take Annabel. She works part-time and studies at university. She has $250 in her bank account and is paid $200 a week by her employer. She buys $200 worth of clothes using Afterpay knowing she’ll pay $50 a fortnight for the next 6 weeks after she makes an initial $50 payment. She believes that the $150 balance owing will be more than covered by her weekly income. She keeps the $150 in her bank account knowing she can make the $50 Afterpay repayments when she gets paid. There are many people like Annabel.

The attraction of Afterpay is the ease of paying off a purchase without incurring interest charges like a credit card would charge if you’re late.  

Millennials, who are reported to be 70% of Afterpay’s customers, prefer to make repayments in installments than spend the entire balance upfront, or face an end-of-month bill from a credit card. 

Retailers like Afterpay for many reasons. 

• Firstly, for online shopping, retailers offering Afterpay see fewer customers abandoning their cart at the checkout because the upfront cost can be spread out over 6 weeks which makes it more affordable. 
• Secondly, shops and online retailers already have to pay credit card companies a fee of a purchase. Like a credit card company, Afterpay charges retailers to offer their service (4%-10%), as they cover the cost of purchase. The benefits of Afterpay for a retailer is that it brings a new group of people who may otherwise not be willing or able to make a purchase. 
• Thirdly, there is a theory that with Afterpay offering a no-interest-ever payment plan, retailers will attract more customers and increased turnover will subsidise the Afterpay fee.

AfterPay has many customers who base their purchasing decision on the smaller repayment number, not the upfront cost. This perhaps is a new way of looking at shopping, and one that Afterpay (and its pay-by-installment rivals) dominates over conventional payment options.

​Credit cards, store cards and long-term finance cards are designed to build up debt. Our guide to how credit cards work explains the mechanics in more detail. Compared to cards, there is a lower chance of building up debt with Afterpay.

​Many people get into trouble with a credit card because it’s more difficult to keep track of purchases. Because credit cards are accepted nearly everywhere, they can easily be used for coffees, a night out, an indulgent purchase alongside routine expenses. Afterpay instead forces shoppers to understand the fortnightly repayment terms upfront, and a series of follow-ups (see below) train the customer to make on-time repayments. 

Credit card and other long-term finance companies, on the other hand, make a lot of money when bills rollover as interest is charged which can compound leading to a debt problems. Furthermore, credit card minimum repayments range between 2-5% for a bill, whereas Afterpay requires 100% of the balance owed to be repaid after 6 weeks.

The use (or misuse) of credit cards and similar finance options have become so commonplace that a significant proportion of New Zealanders don’t pay their balances off after one month, and quickly incur interest. As long as you make the minimum monthly payment, the card-issuer won’t complain. You can also re-spend the money you’ve just paid off. Afterpay, in contrast, requires you to apply to make a new purchase through its platform and sends you a series of reminders and follows up for repayment well before the balance is due. 

Afterpay isn't like other 'interest free' finance options such GEM Visa and Q Card, where such companies offer '0% interest and zero repayments' knowing that if you don’t make any voluntary repayments before the free interest period ends, you will be smashed with a lot of interest charges at the end. 

​How is Afterpay different from a credit card?

• The is no annual account fee when using Afterpay, whereas most credit cards charge a regular account fee
• An Afterpay purchase doesn’t charge interest if you default
• You have a total of 42 days to repay but you'll need to make regular fortnightly payment of 25% of the purchase price over 6 weeks, as well as pay 25% of the purchase upfront. Credit cards can offer up to 45 to 55 days of interest-free terms on new purchases, with the balance due in full at the end of the 45/55 days.
• Afterpay caps its fees at 25% of a purchase value, whereas a credit card will charge you 15%-30% interest per year and this can be for as long as it takes you to pay it off. 
• Afterpay can be approved instantly, whereas with a credit card you’ll need to apply, be credit checked and then wait for approval which can take weeks. 
• You can use a credit card as long as you have the available balance, whereas Afterpay purchases may be declined because their algorithm decided so. 
• If you don’t make Afterpay repayments, your account can be suspended until the balances owed are paid. A credit card is similar, but it’s easier to make repayments given 2% to 5% is often the minimum balance owed. ​​

Your success with Afterpay will depend on how you use it. Just because you are approved for a purchase doesn't mean you will always have the money to make the repayments. If you decide to use Afterpay, 

1. Plan your purchase day - make purchases on your payday or 1-2 days after payday when you know money regularly comes into your bank account. This way you won’t be caught out with ‘insufficient funds’ and will always avoid any late fees. Repayments occur exactly every two weeks after purchase date - its less difficult and budget when you have 1 to 2 repayment days than 8 to 14. 

2. Shop around for the best price on an item – don’t assume that an Afterpay retailer offers the lowest price. Compare retailers to get the best deal. If the retailer you pick already has the lowest price you can find, and they offer Afterpay, it’s likely to be the best option. 

3. Make sure you know you will be able to make the repayments – because Afterpay takes direct debits, not budgeting could mean your bank account is cleaned out leaving no money for regular bills and food. 

4. Have some 'rainy day' money set aside - Afterpay won't work if you currently need to pay for a big purchase and don't have another means of credit. If possible, set aside a sum of money that could pay for a $500 or $1,000 purchase. If something unexpected comes up and you find yourself short of money due to any reason, your Afterpay commitments may be compromised. 

5. Use a debit card for making repayments - using a debit card means you're repaying your purchases with money you have. If you use a credit card, this delays the actual repayment and you could end up paying interest on the items if you can't pay off your bill at the end of the month.

Being careful with what you spend and having a safety fund are two important ways to avoid getting into financial strife. Afterpay. Australian media reports and Afterpay's public relations heavily promote that most of Afterpay's revenue comes from retailer fees and NOT late paying consumers. While we cannot validate the numbers, as a public company in Australia, Afterpay is held to a higher standard when reporting financial information. Recent statements confirm that: 

1. Applicant rejection rates are high - media reports claim that Afterpay rejects around 30 per cent of all attempted transactions between a first-time and returning customer, and up to 50 per cent of all transactions by first-time customers, due to concerns about fraud or customer capacity to repay. 
2. The majority of customers pay on time - according to Afterpay’s 2017 annual report, over 90 percent of orders do not attract a late fee.
3. 80% of Afterpay’s 2017 revenue ($23m) comes from retailers; 20% of revenue comes from customer late fees.
4. Balances owed are reasonably small - more than 90 per cent of accounts have outstanding balances of less than $500, and more than 75 per cent of accounts are less than $350. 
5. 73 per cent of its customer base is made up of 'millennials' (people aged between 17 and 37 (those born between 1980 and 2000).