BNPL payment plan is the latest craze for instant gratification amongst cash-strapped young buyers. ET Wealth has given some indications 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 installments. The BNPL provider settles the bill outright with the merchant on behalf of the buyer. This option is targeted at young, new-to-credit, cash-strapped Millennials, many of whom don’t have credit cards. This gives them easy access to credit for small-ticket purchases. The first time buyer will have to complete the KYC formalities on the provider’s platform. BNPL providers use analytics to gain insights on buyers’ buying behavior and determine their credit-worthiness. The interest-free period generally varies from 15 to 45 days, while the credit limit ranges from Rs 500 to Rs 30,000 – with some extended credits up to Rs 1 lakh.
2. What can be purchased from BNPL?
In recent months, e-commerce companies, fintech companies and even banks have started offering BNPL facility to buyers. Amazon and Flipkart both offer this payment option on their platforms as do banks like HDFC Bank and ICICI Bank. In addition, several app-based fintech platforms such as Paytm, PhonePe, LazyPay, MoneyTap, Cash, Installment, among others, extend BNPL loans. Nowadays, this option is available for purchasing a wide range of items from gadgets to apparel, including food delivery, travel booking, grocery and other expenses.
3. What is the catch?
Apart from easing loan eligibility criteria as compared to other options, interest free window for repayment is the hook for consumers. But you should be able to make the payment 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 charged a hefty late payment fee. If you do not use this facility responsibly then you may fall into the debt trap. In addition, any delay in payment will be reported to the credit bureaus which may adversely affect the credit score of the buyer. This may increase the cost of future loans or, worse, it may prompt lenders to reject any future loan applications.
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4. Is it better than using a credit card?
Credit cards give you the option to delay your payment for a predetermined amount of time. They charge you interest if you do not pay the amount by the due date. But it differs from BNPL in some aspects. BNPL can only be used through a participating merchant whereas credit cards can be used with any business that accepts it as a payment mode. Credit cards often come with onboarding costs such as joining fees in addition to an annual recurring fee. There is no such cost in the BNPL facility, but some non-bank lenders charge a small processing fee. Credit cards usually charge a much higher interest rate than BNPL schemes. While credit cards are known to charge interest rates ranging from 36-45% per annum, BNPL loans are generally available at rates up to 30% per annum. Also, you can apply for a credit card only if you meet the fixed income limit. For anyone who does not meet the strict eligibility criteria for a credit card, the BNPL option offers a way. Most of these consumers can avail BNPL facility quite easily.
But BNPL has some drawbacks as compared to credit cards. The credit limit under BNPL is usually much lower than the credit limit offered by credit cards. While credit cards allow an interest-free period of up to 45 days, some BNPL options allow a shorter repayment window of 15 to 30 days. In addition, using the credit card gets rewards in the form of cashback, discounts, air miles, among other things. With BNPL, you will not get a chance to earn rewards.
5. How to Make the Best Use of BNPL
The ability to defer payment without any interest and break it down into smaller pieces looks very attractive. For consumers, ‘buy now, pay later’ is often the way to make a purchase they can’t afford. Small amounts of people can be tricked Expenditure More than what they really need. Before you finance every aspect of your life with a BNPL loan, make sure you understand its nuances. Don’t go for this option if you are already over leveraged. Small borrowers should keep in mind that this is building up your credit history. Your future creditworthiness depends on your repayment track record. If you use the credit limit responsibly and keep making payments on time, you may also be given an increased spending limit for future purchases.
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