“BUY now, pay later” providers such as Afterpay have been accused of encouraging impulsive buying, irresponsibly targeting young people and exploiting a loophole that means they don’t have to perform credit checks.

An explosion in the popularity of the mostly unregulated sector is contributing to spiralling debt, financial counsellors and charities have told an inquiry into credit services targeted at Australians at risk of financial hardship.

In a twist on the traditional lay-by system, buy now, pay later providers allow consumers to take their purchase home instantly and later pay it off in instalments.

The biggest provider, Afterpay, does not charge interest, but late fees — capped at a maximum of $68 — are payable if a repayment is missed.

Last financial year, the Australian tech company raked in $28.4 million from late fees, which accounted for a quarter of its income.

“This is antithetical to a company who claims, ‘Our mission is, and always will be, to empower our customers’,” consumer watchdog Choice wrote in its submission.

“The stark reality is that these schemes profit when Australians are unable to pay on time and are forced to pay late fees.”

The Salvation Army said the nature and design of buy now, pay later schemes — which also include ZipPay, Oxipay, PayRight and Zumi — encouraged spending beyond a person’s means.

“Although there is a fee-free period for buy now, pay later payments, instalments can be set up on a credit card thereby potentially increasing the debt load of that person and their credit obligations, without there being any credit assessment process,” the charity warned. “There appears to be irresponsible and direct targeting of younger people, encouraging purchases that are not affordable.”

It estimated between 5 per cent and 20 per cent of people seeking financial counselling had used a buy now, pay later service, in most cases younger women.

The WA Consumer Credit Legal Service said one of Afterpay’s key branding messages was that it approved consumer’s purchases instantly, “in direct disregard to responsible lending”, and that the lender’s income from late fees surged 365 per cent last financial year.

Because Afterpay does not charge interest or establishment fees, it is not captured by the National Credit Code, which means it has no responsible lending obligations and does not have to perform credit checks.

In its submission, Afterpay argued that rather than taking advantage of that loophole, the service was deliberately different to traditional lending products. It said its business model was based on charging transaction fees to merchants, which account for more than 75 per cent of its revenue.

“We freeze accounts if someone is late on a single payment, which means they can’t make another purchase until they have settled the outstanding payment and therefore debt cannot accumulate and revolve,” it said.

On the Australian Securities and Investments Commission’s suggestion, the Federal Government has released draft laws that would introduce “product-intervention powers” allowing the watchdog to intervene in the operations of buy now, pay layer providers if it believed there was a significant enough risk to consumers.

Afterpay was approached for comment.