Consumer groups in Western Australia are raising the alarm about the practice of car dealers using buy now, pay later services to get around borrowing limits set by traditional lenders, a practice that may push vulnerable customers into unaffordable debt. 

Last year the Consumer Credit Legal Service Western Australia (CCLSWA) met with the state's consumer affairs body and wrote to ASIC about the practice after learning about two recent cases. 

Steve (not his real name) was 19 years old when he purchased a secondhand car in November 2020. He told the dealership he could only afford repayments of $50 a week as he was working casually at the time. He was told that with his $3000 deposit, the onsite lender would provide finance for a total of $19,500, inclusive of a warranty. 

CHOICE gave Humm a Shonky Award in 2021 for failing to do proper assessments of a customer's ability to repay

Unfortunately, the $19,500 loan was rejected, and so Steve told the dealership that he wanted to cancel the contract. However, the dealership suggested a workaround. The amount of $17,000 would be obtained through the loan application, and the further $2500 to cover the car's warranty would be obtained through buy now, pay later provider Humm. 

CHOICE gave Humm a Shonky Award in 2021 for failing to do proper assessments of a customer's ability to repay before signing them up to large amounts of debt. 

Steve now needed to pay the lender $75 a week for the car loan, and Humm a further $48 a fortnight, leaving him out of pocket by almost double the amount he had initially said he was comfortable paying. 

He also wasn't told that the 'extended warranty' had a $3000 limit on it, so when the car's head gasket blew some three months after its purchase he was left uncovered for the $12,000 the mechanics said it would cost to replace the entire engine. 

The young man is now left without the money to fix his broken car, with a warranty that doesn't cover him and with large sums owing to both the car dealership and to Humm. 

We will likely see more people with multiple BNPL debts struggling to make repayments.

Predatory use of BNPL

Roberta Grealish, the principal solicitor at CCLSWA says Steve's case highlights a predatory use of BNPL providers to exploit vulnerable customers. 

"Steve's case reflects predatory behaviour on the part of the dealership, to circumvent responsible lending laws by deliberately arranging a BNPL for the add-on warranty, to reduce the total amount required as a regulated car loan. The dealership then pressured Steve to proceed with the purchase because finance had been approved," she tells CHOICE. 

The dealership was fully aware that the loan sought had been rejected by a credit provider

Roberta Grealish, CCLSWA

"This conduct is particularly concerning given that it was in circumstances where Steve had not asked for a BNPL arrangement, he was not told about such an arrangement beforehand, and the dealership was fully aware that the loan sought had been rejected by a credit provider (complying with responsible lending laws). Steve was young and financially vulnerable, and significantly, he did not have the ability to meet the proposed weekly repayments," she says. 

"Clearly the dealership used the BNPL arrangement to secure the sale and to advance its own interest." 

Susan said she felt she was being 'strong-armed' into an agreement she wasn't happy with

In another case seen by CCLSWA, Susan (not her real name) was offered an almost $6000 extended warranty, which was split off the main purchase of her $40,000 2015 Land Rover Discovery Sport. 

Susan didn't accept the arrangement, which was with buy now, pay later provider Payright, but said she felt she was being "strong-armed" into an agreement she wasn't happy with. 

Grealish said Susan's was another case where the dealer had attempted to use BNPL to improve the chances of a loan getting approved by hiding part of the purchase price. 

She added that this was risky, especially as the BNPL loans may be invisible to the lender's responsible lending assessments if they occurred after the main purchase. 

"In the absence of proper and measured regulations, dealerships would be permitted to engage in inappropriate lending to financially vulnerable consumers, without fear of compliance and/or enforcement actions, with the result that we will likely see an increasing number of consumers with multiple BNPL debts who are struggling to make repayments," she says. 

Skirting safe-lending laws 

James Hunt, policy lead at Financial Counselling Australia says these cases are concerning as BNPL is being used to get customers in over their heads with debt they can't afford. 

"We need stronger safeguards for buy now, pay later, as BNPL products should not be used to skirt safe-lending laws which exist to protect consumers from unsafe levels of debt," he tells CHOICE. 

"We continue to call on the Federal Government to initiate an independent review into BNPL and wage-advance products, to find appropriate safeguards that will make these products safer for all BNPL users." 

Here at CHOICE we have raised concerns about the BNPL industry's expansion from small discretionary items into all aspects of everyday life. 

There's a very good reason that we have laws to restrict the way that credit is provided, especially in places like car yards

CHOICE CEO Alan Kirkland

CHOICE CEO Alan Kirkland says cases like these are just another example of the way that BNPL is being used to get around credit laws that are meant to protect consumers.

"There's a very good reason that we have laws to restrict the way that credit is provided, especially in places like car yards," he says. "We've seen time and time again that high-pressure sales tactics often leave people with debts they can't afford. 

"Car finance companies are required to check if a loan is suitable and affordable, and if something goes wrong you can complain to the Australian Financial Complaints Authority. None of those protections apply if you borrow money through BNPL. These cowboy credit providers need to be properly regulated."

Stock images: Getty, unless otherwise stated.

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