Yahoo Finance Rachel Cruze Just Shared 6 Crucial Things You Need To Know About Afterpay
Since it got its first customer a decade ago, Afterpay has been soaring in popularity. Co-founded by Anthony Eisen and Nick Molnar, Afterpay reportedly had 4.2 million U.S. monthly active users as of 2023.
The concept and usability of Afterpay is simple: Download the app and pay for something you buy in four interest-free installments over six weeks. Easy, right?
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It’s simple to use, but before getting started with or diving deeper into using Afterpay, let’s hear some important aspects that financial guru and Dave Ramsey team all-star Rachel Cruze has to say about it.
How Afterpay Works — and Can Enable Overspending
We’ve covered the very basics of how Afterpay works, but Rachel Cruze has gone into more detail on the Ramsey Solutions site. Here’s how she breaks it all down:
“A customer downloads the app and creates an account.
They set up the digital Afterpay Card and connect it to their Apple Wallet or Google Wallet.
They shop at any store found in Afterpay’s Shop Directory. (This can be online, in a physical store, or on Afterpay’s app.)
The customer sees something they want–but can’t afford right now.
They tap to make the first payment (25% of the cost).
Then they pay another payment every two weeks for six weeks, until the item is paid off.
The customer will lather, rinse, repeat with as many purchases as they want, racking up as many of those payment plans as they want (as long as they keep making payments).
The customer can use the app to manage all these payments.
If the customer misses a payment, it’s fee time, and they can’t make another purchase.”
So, again, super simple, right? Well, perhaps not so much on a psychological level. Cruze says that Afterpay enables “retail therapy” — when you buy something to feel better in the moment, even if you can’t safely afford it — to control your money.
“The customer can fall deeper into the lie that buying everything they want when they want it (even though they can’t afford it) is the key to happiness,” Cruze wrote. And this is where things can get dangerous.
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Using Afterpay To Pay Bills: Is it Possible?
Cruze says she found information online that claimed you can pay your bills with Afterpay.
“But the truth is, you can’t,” she wrote. “The company’s own website clearly says you can use Afterpay online or in store with any of their partnering retailers. There’s zero mention of spreading out your electricity, rent or water bill payments here.”
How Afterpay Makes Money
In 2019, Square acquired Afterpay for $29 billion. Clearly this company is raking in tons of money to sell for such a hefty price. How does it make all that money? Cruze explained.
Afterpay Charges Interest on Purchases of $400 or More
“In the very fine print on their website, they explain that their APR (annual percentage rate) on this plan can range from 6.99% to 35.99,” Cruze wrote. “You guys, the average interest rate right now on credit cards is at an all-time high of 22.63%. And Afterpay can jump up to 35.99%? No, thank you.”
It Utilizes Retail Partnerships
Afterpay also makes money through retail partnerships.
“Currently, they work with thousands of brands (like Apple, Best Buy, lululemon, Sephora, Target) and have ‘helped’ 19 million customers use their service to ‘get everything you need now,'” Cruze wrote. “These companies give Afterpay a portion of every sale. And they get a lot of sales from Afterpay.”
Late Fees
We know that many BNPL users are late on payments. Afterpay is banking on your delinquency in making payments on time.
“If you’re late on one of those payments, Afterpay charges late fees up to 25% of the order’s value,” Cruze wrote.
Afterpay’s Credit Limits
Afterpay has credit limits for users. This limit depends on several factors, as listed by Cruze:
How long you’ve had an Afterpay account
How often you use it
Your payment source
History of making payments
How often you’re declined for a purchase because you didn’t have the 25% to put down
“Basically, customers who’ve been with Afterpay longer, and shown they pay on time, are allowed to borrow more,” Cruze wrote.
Afterpay and Your Credit Score
By signing up for Afterpay, you’re agreeing to allow them to perform at least a soft credit check, “meaning they can peek in on your credit report,” Cruze wrote. “And any time you use the Pay Monthly option while checking out, Afterpay will run a credit check.”
Though buying things via Afterpay won’t directly harm your credit score, not making payments can.
“If you don’t make payments, that will affect your score,” Cruze wrote. “And it gets worse. Afterpay can turn you over to debt collections.”
Afterpay and User Safety
Cruze posed the question, “Is Afterpay safe?” The answer is somewhat murky.
“This depends on how you define ‘safe,'” Cruze wrote. “Do you mean are they going to take your Apple Wallet, Google Wallet or bank info and deposit loads of your money into an offshore account as their CEOs sip Mai Tais and laugh at your loss? Not likely.”
But any time you’re giving an app your personal and financial info, you’re assuming some risk. But that’s not what Cruze suggests is the biggest risk here; it’s the drive to overspend and impulse buy.
“They literally claim on their website (when encouraging retailers to partner with them), that ‘shoppers who use Afterpay spend +40% more than those who do not’ and ‘shoppers who use Afterpay shop +50% more frequently than those who do not,'” she wrote.
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This article originally appeared on GOBankingRates.com: Rachel Cruze Just Shared 6 Crucial Things You Need To Know About Afterpay
