Buy now, pay later schemes can be helpful for funding trips if you use them a certain way, financial mentors say. Photo / 123rf
Buy now, pay later schemes can be helpful for funding trips if you use them a certain way, financial mentors say. Photo / 123rf
A rising number of Kiwis are opting to use buy now, pay later to fund their holidays. Herald Travel asks financial experts about the benefits and potential pitfalls.
As nice as it would be, travel isn’t free, especially when you’re a Kiwi looking to fly overseasfor a winter escape.
Some travellers aren’t letting a lack of funds get in the way of a good holiday according to data from Mix and Match, a New Zealand-owned and operated online travel company.
Most (61%) customers used Afterpay, Laybuy or buy now, pay later services when booking travel between January 1 and June 10 this year, 6% up from the same period in 2023.
This increases further when looking at domestic flights, with 68% of customers paying via buy now, pay later services.
In response to rising demand, Mix and Match have launched a product that allows customers to use two different payment methods when booking flights, including Afterpay, Laybuy, account to account and credit card.
‘MixPay’ is available for all flight bookings on the platform and aims to give customers the freedom to “focus on creating unforgettable travel memories,” according to Mix and Match chief executive Tim Paulsen.
The question some discerning Kiwis may have is, what are the risks and rewards of holidaying now and paying later?
Using buy now, pay later to find travel is nothing new. In 2022, Afterpay officially partnered with travel booking company Expedia to allow customers to pay for travel in four instalments and companies such as Flight Centre also offer extended purchasing schemes.
While many financial advisers discourage using buy now, pay later to fund holidays, financial mentor David Verry, said the approach “does have its place”, despite not using it himself.
“I’m not fundamentally against the use of those products if people have the resources to meet them and they’re not going to incur any interest charges, they’re not going to incur any default fees,” he said.
A ‘no interest’ option can allow people to continue earning interest on their savings. For example, if you have $2000 in the bank to fund flights to Europe, paying it over an extended period means the money can earn interest in the bank for longer, Verry said.
“I could have that money sitting on deposit in the bank and then as I need it, I bring it in and I make the payment so I can still earn interest on that money that I’ve got.”
In this way, buy now, pay later is similar to a credit card, which you can take into overdraft but must be paid by a monthly date. Like a credit card, it’s “critical” to know you can pay it off, Verry said.
“We paid for our holiday, I put it on a credit card, but I pay the credit card off every single month, so I incur no interest charges.”
According to the financial mentor, buy now, pay later turns bad when people can’t pay later because of unexpected costs or if they miscalculate their cash flow and face late-payment fees.
Buy now, pay later turns problematic when people miss payments. Photo / 123rf
Is a holiday ‘good debt?’
Not all debt is ‘bad’ Verry said, as people could also have ‘good debt’ or ‘not-so-good debt’. Mortgages and interest-free student loans can be good debts as they are an asset or increase your value.
Not-so-good debts are loans for cars, jet skis, and refrigerators; items worth less once owned but still are objects you can use and enjoy. Unfortunately for cash-strapped experience lovers, bad debt includes food-related expenses, concert tickets and travel.
“Anything that’s gone once you’ve used it is just not good debt to have”, Verry said, adding that holiday photos and memories quickly fade.
Control is key to success
It’s also “very, very easy” to sign up and end up with “eight or nine different payments” in a week for items you’ve purchased.
“It’s amazing how quickly it balloons,” Verry said, so people should have self-discipline if they decide to sign up and be confident of their cash flows.
Financial journalist and author Mary Holm agreed that, when used with control, it can be useful.
“If they’re totally in control of buy now, pay later and they never end up paying any fees or any interest, then I suppose there’s not much wrong with it,” she said. However, people with that amount of control are better off saving first and earning interest, she said.
Financial columnist and journalist Mary Holm. Photo / Babiche Martens
Missing motivation
It can be hard enough to give up certain leisure spending to save for an upcoming holiday, harder still to make those financial sacrifices once the trip is a fading memory.
“How depressing it must be to come back from the trip and you have got the memories and the photos, that’s not nothing, but still having to come up with money some months after,” she said.
The difference with an object such as a coat, she said, is that you continue to have and enjoy it for months or years, making the process of paying it off possibly sting a little less.
Financial experts suggest best way to save for a holiday
If you don’t have the cash handy for a holiday, what should Kiwis do? Plan far in advance, Holm and Verry suggest.
“Maybe skip travelling for six months and instead be stacking the money up in a savings account and earning interest on it,” Holm advised.
“You’ll have more travel in your life because you’ll be earning interest on the money instead of paying interest or fees on money.”
When working with clients to plan budgets, Verry said it’s best to estimate how much you want to spend, then calculate the amount you must save each week or month to have enough money in time for the trip.
