Using Afterpay or similar buy-now-pay-later (BNPL) services can impact your car loan application in Australia. This is because lenders often evaluate your overall financial behaviour, including your spending and credit habits, when assessing your ability to repay a new loan.
While Afterpay itself doesn’t directly affect your credit score, frequent or heavy use of such services may still raise red flags for lenders when they assess your application. Here are some of the potential implications.
Credit Reporting
Firstly, although Afterpay and similar BNPL services like Zip and Humm generally don’t report their usage to credit bureaus unless you default, lenders increasingly consider BNPL spending patterns.
When you apply for a car loan, lenders typically review recent bank statements and your transaction history. Frequent Afterpay transactions may indicate to a lender that you rely on short-term credit for everyday purchases, which can signal a cash flow issue or a tendency towards impulse buying.
If lenders perceive that you are using BNPL services frequently or accumulating a large amount of debt, they may view this as a sign that you are over reliant on credit. This perception can result in a more cautious approach to your loan application, potentially lowering the amount you qualify for, or even leading to a rejection.
Payment Cycles
Even though Afterpay does not charge interest, it has a structured repayment plan, typically requiring you to repay the amount within four fortnightly instalments.
If you use Afterpay frequently, these instalments can add up, thereby affecting your monthly disposable income. Lenders assess your debt-to-income ratio (DTI) when determining your loan eligibility, which calculates how much of your income is already committed to existing debts.
Frequent Afterpay instalments, while technically not loans, may still impact your DTI ratio because they reduce your disposable income and can complicate lenders’ assessment of your repayment capacity. The higher your DTI ratio, the riskier you appear to lenders, which could lead to either less favourable loan terms, or a lower loan approval amount.
Missed Payments
While BNPL finance may not be recorded on your credit file if managed responsibly, missed or late payments on BNPL accounts could lead to penalty fees and potential negative credit reporting if these payments remain outstanding.
Car loan lenders can interpret recent penalties as a lack of financial discipline or an indication that you struggle with managing short-term debts, which can influence their decision to grant a car loan.
Some lenders also conduct thorough affordability checks and may ask about your spending habits, requiring full disclosure of all financial obligations, including BNPL commitments. Concealing BNPL obligations could lead to complications if lenders later discover these through transaction history, resulting in a damaged trust with the lender and a possibly compromised loan application.
The Perception of BNPL
Lastly, it’s worth noting that while Afterpay itself doesn’t offer loans in the traditional sense, some lenders view heavy BNPL usage as credit-seeking behaviour.
This behaviour, coupled with high expenses or low savings, may make lenders question your financial management skills. For this reason, if you’re considering applying for a car loan, it’s wise to minimise BNPL use in the months leading up to the application to show that you are not overly reliant on short-term financing.
Demonstrating strong financial management through budgeting, savings, and maintaining a low DTI ratio can increase the changes of your application being approved.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.