So-called "buy now pay later" arrangements for essentials such as food and medicines should be banned, consumer groups say.
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Federal parliament is considering changes to credit laws that have not covered wage advances or the increasingly popular short-term form of borrowing that allows shoppers to obtain goods immediately but pay for them in instalments.
On Wednesday, providers told a parliamentary hearing the service could be a better option than high-interest credit cards or bank loans.
But financial counsellors warned of financial distress, with cash-strapped clients already behind on rent or their mortgage juggling more lines of credit and being stung by late fees.
Consumer lawyer Paul Holmes at Legal Aid Queensland said there should be an advertising ban on using the service to pay for grocery shopping or health care.
Providers should also be prevented from taking security over assets - particularly those of low-income or vulnerable Australians, he said.
The draft bill would cap late fees, enshrine the right to hardship assistance and to make complaints, and require providers to assess the risk people signing up for the arrangements could not afford to repay the debt.
The whole sector, not merely operators covered by an existing voluntary code of conduct, would be required to comply.
But consumer groups warned the focus on purchases of up to $2000 was too low as high-value buy now pay later loans also carried financial risk for any kind of borrower.
Choice spokesman Tom Abourizk said more people were using the form of credit to pay for essentials such as food during the cost-of-living crisis.
Mr Abourizk said deferring payments for essentials was "a recipe for disaster" that could add extra fees to already strained budgets.
"People on low incomes wind up with multiple buy now pay later products and end up paying a big portion of their income in fees," he said.
According to financial counsellors, a majority of clients had buy now pay later debts and each had an average of three separate unpaid commitments.
While some are using the service to buy solar panels, wedding dresses, furniture and home upgrades, the average transaction was $132, according to industry data.
Australian Finance Industry Association chief executive Diane Tate said fewer than one per cent of people using the service needed support in the form of financial hardship assistance.
Afterpay spokesman Michael Saadat called for Australia to model its laws on the world-first regulatory framework introduced in New Zealand to lower costs for businesses operating on both sides of the ditch.
Hamilton Locke law firm financial services and consumer credit partner Jaime Lumsden said the reforms would make it harder for people to access low and no-cost credit for small purchases while shopping online.
The reforms also failed to cover "debt factoring", where bundles of unpaid invoices are sold to another company for collection, she said.
Australian Associated Press
