Before opting for such a plan, keep it in mind that you should be able to make the payment of BNPL offer on time. Or else, like any other loan default, it can have negative consequences, ie, a miss out can affect you credit score.
Why it matters more to young and new borrowers
Credit score gives an indication of how disciplined a borrower has been in repaying his loans. Most traditional lenders such as banks and non-banking finance companies (NBFCs) rely on credit score data before approving a traditional loan or line of credit to a borrower. However, new-to-credit (NTC) are potential borrowers who have never taken out a loan, or have no other credit lines, and, therefore, have no credit history that a lender can assess. Hence, such borrowers tend to avail credit options like BNPL and that is why they are the focus segment of BNPL lenders.
Most of these are either young consumers or people who do not have any formal credit lines like credit cards or EMI cards to make payments. This is why this group is most vulnerable to the adverse impact of a default on any new credit because of being unfamiliar with the credit and the consequences of the default. So, if you belong to this group, you need to ensure that you do not default on the payment if you opt for the BNPL plan to make the purchase.
BNPL repayment is tracked and reported to credit bureaus
BNPL offers short term loans through a credit free period ranging from 15 days to 45 days after which the borrowers have to pay the entire due amount. If you think this is a small credit and therefore any default will have no consequences, you are wrong.
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For example, as per the terms and conditions of ICICI Bank’s pay letter, “If the total amount due is not paid within the due date of payment, it will be treated as a default by the bank. PayLater The customer and he shall be liable to pay the amount along with default interest and late payment charges as specified in the next month’s statement of account.
Similar to any formal credit such as a loan or credit card, the repayment track record of all borrowers using BNPL is reported to the credit bureaus. Anurag Sinha, cofounder and CEO of credit score management platform OneScore, says, “BNPLs offered in partnership with banks and NBFCs are reported to credit bureaus and repayment behavior of bureau scores to the same effect. ” Hence, any complacency in case of default can rest on your credit history which will not only bring down your credit score but can also sharply increase the cost of future credit and in the worst case it can make you reach credit in future. can also stop.
Factors that may prevent you from accessing BNPL facility
BNPL players lending to NTC borrowers are not heavily dependent on credit scores, as lenders conduct credit appraisals through alternative means. The most basic information on which a BNPL lender relies is the customer’s past buying behavior with the merchant, if any.
Vishal Maru, Senior Vice President – Merchant Payment Services, Loyalty and Digital Payments, Worldline says, “BNPL players are partnering with major ecommerce players to provide some basic yet important information about the customer such as their purchase history, payment behavior etc. to reach.” India
This data is used not only to sanction credit but also to decide the amount of credit extended to the borrower. Anoop Agarwal, Business, Anoop Agarwal says, “LazyPay uses analytics to understand a consumer’s background and gain insights on their buying behavior to determine their spending limit. This process is independent of an individual’s credit score. and is therefore more inclusive for new-to-credit consumers.” Head, LazyPay, a BNPL lender.
This can also include your income profile and payment behavior. Sinha says, “Some of the most widely used approaches are income-based valuation, bank statement-based valuation. There are lenders who also use alternative data like telecom, vehicle ownership etc. to assess NTC customers. Huh.”
Take your digital and social media footprints seriously
The use of online social media and other digital platforms is on the rise in the age of smartphones and low internet costs. This increases digital footprints that can be traced by others. Many lenders have developed tools to analyze these digital footprints and predict user creditworthiness.
“CASHe’s proprietary credit assessment framework uses a combination of Social Loan Quotient (SLQ), Big Data Analytics and proprietary AI based algorithms to measure traditional inputs and evaluate a user’s digital footprint to measure their creditworthiness. SLQ Dynamic and forward looking. Designed as it measures propensity for default based on current behavioral information of a borrower,” says Yogi Sadana, CEO, Cashe, an instant lending fintech player.
So, what kind of digital data do these lenders look at while evaluating the creditworthiness of borrowers? “These include looking at the customer’s digital footprint, identification triangles, banking debit and credit through multiple sources (Aadhaar, NSDL, bureaus, banking profile etc.), prior purchase history and other data points such as utility bill payments etc. to understand both. Having a robust fraud-prevention engine in the background along with customer’s creditworthiness,” said Krishnan Viswanathan, CEO and Founder, Installment, an instant lending fintech player.
In addition to many other factors, your social media activity is also taken into account when assessing your credibility. “It is linked to multiple data points which also includes online and offline data of borrowers such as their mobile and social media footprint, education, remuneration, career and financial history. The scores are generated in real time which enables the customer to know is, within a few seconds, if he qualifies for a loan with cash or not,” says Sadana.
Smaller credit limit for NTC borrowers: Although a BNPL lender is generous in extending loans to new borrowers, the credit amount remains low initially. “Based on these basic background checks, customers are offered a line of credit option for smaller ticket sizes, with eligibility increasing over time,” says Maru.
Borrowers with low credit scores get BNPL access but at a higher cost
While many traditional lenders may reject borrowers with low credit scores, such borrowers are more likely to get credit through BNPL as BNPL players depend on their internal assessment in addition to credit scores.
“Given the segment we target (low income and self-employed), these households are often susceptible to income disruption resulting in a poor credit profile. These borrowers are not inherently risky and A lender needs to offer a product that is flexible than one. To ensure that the repayment approach is of maximum relevance. If the product is built in the right way – these customers find it easier to manage their payments ,” says Viswanathan.
However, the interest rate charged to these borrowers is high. “There is risk inherent in the business, and we understand that there will be credit losses. Pricing ensures that such risks are baked in so that the company can still make profits,” says Viswanathan.