Zip Finance Charge: Understanding the Hidden Costs

Zip Finance Charge can be a sneaky addition to your bills, catching you off guard with its high fees.

The average finance charge on a Zip account is around 24.99% per annum, which can quickly add up if you're not paying off your balance in full each month.

This high interest rate is a major factor in why Zip Finance Charge can be so costly.

For example, if you have a balance of $1,000 on your Zip account and you're charged an average finance charge of 24.99%, you'll be paying around $249 in interest alone.

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Zip Pay is a convenient option that lets you access credit at the point of purchase with minimal hassle and little delay.

Its automated application process is quick, and it may perform a credit check, but there's no explicit income verification procedure.

Zip Pay promotes itself as "interest-free", but instead, it charges a flat fee of $6 a month on whatever is owed.

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If you miss the minimum monthly payment of $40, you'll be charged an additional $5.

The service also charges a 4% upfront fee to the retailer, which means it pays the retailer $960, then collects $1,000 from the customer.

This easy credit option could be attractive if you're confident you'll have more money in the future than you have now.

Zip Pay's $6 monthly fixed fee is essentially a quasi-interest charge, equivalent to paying 7.4% interest annually on a $1,000 debt. This fee structure is regressive, meaning the less you owe, the greater the effective interest rate you pay.

If you owe $500, the $6 fee translates to a 15% annualised interest rate. This is a significant interest rate, and it's likely to encourage you to take advantage of the full $1,000 of credit, which may not be in your best interest.

The fee structure is designed to keep you in debt for longer, as you'll be paying more in fees than you would with a traditional interest rate. For example, if you owed $1000 and made only the minimum repayment of $40 a month, it would take 2.5 years and cost you $230 in fees.

Here's a comparison of Zip Pay's fees with a low-interest credit card:

Implicit costs can be sneaky, and they're often hidden in the fine print.

Zip Pay's $6 monthly fixed fee is essentially a quasi-interest charge, equivalent to paying 7.4% interest annually on a $1,000 debt.

This fee structure is highly regressive, meaning the less you owe, the greater the effective interest rate you pay.

If you owe $500, the $6 fee translates to a 15% annualised interest rate, which is a pretty steep price to pay.

Owing $100 means the $6 fee equals an annual interest rate of more than 100%, which is a staggering amount of interest.

This is a key thing to keep in mind when using Zip Pay or any other service with similar fee structures: the less you owe, the more you'll pay in interest, so it can be tempting to take out the full amount of credit.

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Low minimum repayments can lead to long-term debt. If you owe $1000 on Zip Pay and make only the minimum repayment of $40 a month, it would take 2.5 years and cost you $230 in fees.

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Zip Pay and Zip Money will charge you a $15 dishonour fee if a payment doesn't go through, which may be on top of a dishonour fee from your bank.

Minimum repayments with Zip Money are scaled to the amount owing, starting at $40, and are either the amount stated on your contract or 3% of your balance owing (whichever is greater).

If you owed $1000 with Zip Money and were being charged 23.9% interest and the $7.95 monthly fee, and a 0% introductory interest rate for 3 months, it would take you 2 years and 9 months to pay off at $40 or 3% (whichever is greater) a month and cost you $543 in fees and interest.

In comparison, using a low-interest credit card like Westpac's low-rate card with an interest rate of 13.74% and a $59 annual fee would take you 2.5 years to pay off and cost $362 in fees and interest – $181 cheaper than using Zip Money.

Here's a comparison of the costs:

The lack of regulation in the BNPL sector has led to high costs for consumers, which are ultimately passed on through increased prices and late fees.

In 2022, the federal government committed to regulate BNPL loans as credit, a move that was met with support from consumer advocacy groups like CHOICE.

The costs of BNPL products are significant, with consumers bearing the brunt through increased prices and late fees, making it essential for regulation to be put in place to protect consumers.

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The permanent income hypothesis, first proposed by Milton Friedman in 1957, suggests that people's spending habits are based not only on their current income but also on their anticipated future income. This idea explains why younger and well-educated individuals are more likely to borrow money to fund current consumption.

Typically, those under the age of 24 make up almost a quarter of Zip customers, and over 60% are under 36. This is because they have a greater expectation that their income will increase over time.

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Easy access to credit can encourage individuals to take on more debt, which can have negative consequences. Research by the Australian Securities and Investments Commission shows that the majority of "buy now pay later" users admit easy credit has led them to spend more money.

One in six users report some negative impact as a result, including becoming overdrawn, borrowing money from family or friends, or using another loan provider to cover their debts.

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The BNPL sector has brought in a voluntary code, but it falls short of addressing the high costs, inadequate hardship policies, and overselling of credit to people who are already under financial pressure.

CHOICE has reviewed the code and found it lacking in key areas. Consumer advocacy groups have been calling for tighter consumer protections, including a cap on costs in the same way that credit and debit costs are capped.

The voluntary code doesn't deal with the high costs associated with BNPL products, which are ultimately borne by all consumers through increased prices and late fees.

In 2022, the federal government committed to regulate BNPL loans as credit, but the voluntary code doesn't meet the necessary standards.

CHOICE, as part of the Close Lending Loopholes alliance, made a joint submission supporting the full regulation of BNPL loans under financial laws.

Zip Pay doesn't charge interest, but it does have a finance charge, which is essentially a fee that's added to each installment payment on your plan. This fee is automatically divided into four and can range from $0 to $7.50 per order.

The finance charge is added to each installment payment, so if you have multiple transactions, the fees can add up quickly. For example, if you have four transactions with a $7.50 fee each, you'd pay $30 in fees.

Zip Money, on the other hand, does charge interest, with a hefty rate of 23.9% applied after an initial interest-free period. This can lead to a lot of extra costs if you don't pay off your balance in time.

If you're considering using Zip Money, it's worth noting that the interest rate is higher than many credit cards. You might be better off with a low-interest credit card or personal loan if you don't think you can pay off your items in the interest-free period.

The monthly fee for Zip Money is also $7.95, which can add to your overall costs. If you're 21 days in arrears of payment, you'll get charged an extra $15.

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Zip makes money by charging customers fees, which is a straightforward way to generate revenue.

Zip Pay also charges retailers a percentage every time a sale is processed on its platform, which can add up quickly.

This fee is a key part of how Zip Pay makes money, and it's a common practice in the buy now, pay later (BNPL) industry.

Here are the two main ways Zip Pay makes money:

Zip Money makes money by charging people interest on their purchases, which can be a significant source of revenue for the company.