The BNPL payment scheme is the latest craze among young cash-strapped shoppers seeking instant gratification. ET Wealth shares a few pointers about the trend.
1. What is BNPL?
Buy now, pay later (BNPL) is a financing avenue that allows shoppers to buy something but pay for it later within a stipulated interest-free period in three or more instalments. The BNPL provider settles the bill outright with the merchant on the buyer’s behalf. This option is targeted at young, new-to-credit, cash-strapped millennials, many of whom don’t have credit cards. It offers them easy access to credit for small-ticket purchases. A first-time buyer will have to complete KYC formalities on the provider’s platform. BNPL providers use analytics to get insights on buyers’ purchase behaviour and determine their credit-worthiness. The interest free period typically varies from 15 to 45 days while the credit limit ranges from Rs 500 to Rs 30,000—with a few extending credit up to Rs 1 lakh.
2. What can be bought with BNPL?
In recent months, e-commerce companies, fintech players and even banks have started offering BNPL facility for shoppers. Amazon and Flipkart both offer this payment option on their platforms as do banks like HDFC Bank and ICICI Bank. Further, several app-based fintech platforms like PayTM, PhonePe, LazyPay, Moneytap, CASHe, Kissht, among others, extend BNPL loans. Nowadays, this option is available for purchase of wide-ranging items from gadgets to apparel, including food delivery, travel booking, grocery and other spends.
3. What is the catch?
The interest-free window for repayment is the hook for consumers, apart from the relaxed loan eligibility norms compared to other options. But you should be able to pay within this time frame. If a buyer fails to pay the amount within the defined repayment window, the lender will charge interest on the unpaid amount. You may also be levied hefty late payment fees. It is possible to fall into a debt trap if you don’t use this facility responsibly. Further, any payment delays will be reported to the credit bureau which can adversely impact the buyer’s credit score. This could jack up the cost of future loans or worse, it may prompt lenders to reject any future loan applications.
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Watch out for these costs in Buy Now, Pay Later schemes
4. Is it better than using a credit card?
Credit cards already give you the option of delaying your payment for a stipulated time. These charge you interest if you do not repay the amount by the due date. But these differ from BNPL in certain aspects. BNPL can be used only via a partner merchant whereas a credit card can be used with any business that accepts it as a payment mode. Credit cards often come with onboarding costs like joining fees apart from annual recurring fees. BNPL facility does not carry any such costs, but a few non-bank lenders charge a small processing fee. Credit cards typically charge much higher interest rate than BNPL schemes. Where credit cards are known to levy interest rates ranging from 36-45% per annum, BNPL loans are generally available at rates up to 30% per annum. Further, you can apply for a credit card only if you meet certain income threshold. For anyone not meeting the strict eligibility criterion for credit cards, the BNPL option provides a way out. Most of these consumers can get the BNPL facility quite easily.
But BNPL has certain shortcomings compared to credit cards. The credit limit under BNPL is usually much lower than what is offered by credit cards. While credit cards allow interest-free period of up to 45 days, some BNPL options permit a smaller repayment window of 15 to 30 days. Further, usage of credit cards fetches rewards in the form of cashbacks, discounts, air miles, among other things. With BNPL, you will not have the chance to earn rewards.
5. How to make best use of BNPL
The ability to defer payment without any interest and dice it into smaller pieces sounds very appealing. For consumers, ‘buy now, pay later’ is often the route to make purchases they can’t afford. Small amounts can trick people into spending more than what they really should. Before you rush to finance every aspect of your life with a BNPL loan, make sure you understand the fi ne print. If you are already overleveraged, don’t go for this option. Younger borrowers should keep in mind that it is creating your credit history. Your future creditworthiness hinges on your repayment track record. If you use the credit limit responsibly and keep repaying on time, you may even be given enhanced spending limits for future purchases.
Also read:
Using Buy Now, Pay Later scheme for your purchase? This is what will happen if you default on payment
