For example, Amazon and Flipkart are not only offering a free credit period through Buy Now, Pay Later option, but they are also offering a cashback of Rs.100. Croma is offering a voucher worth Rs 250 if you pay through it separate money ICICI Bank Alternatives Paylater. Many more merchants have similar offers.
Yes, the pandemic has cost many of us our pockets, and such BNPL schemes look attractive. However, to arrive at the ‘actual cost’ of such BNPL offers one needs to do some number crunching – in most cases, paying more than the original purchase cost of the product or service.
So, if you are planning to opt for BNPL offers this festive season, you need to be mindful of the costs involved.
Actual cost of BNPL
There are two ways the lender makes money from your purchases made using the Buy Now, Pay Later plan.
Merchant discount rate during income debt free period: During the credit-free period, mostly between 15 days and 45 days, lenders do not charge customers any interest if the customer pays the total outstanding within this period. However, this does not mean that the lender does not earn; They also earn for this period of borrowing. It works on the Merchant Discount Rate (MDR) model, says Vishal Maru, Senior Vice President – Merchant Payment Services, Loyalty & Digital Payments, Worldline India. MDR enables these lenders to offer interest free loan tenure under BNPL option.
Explaining its BNPL offering, FlexiPay, HDFC Bank said on its website: “No additional cost is provided for 15 days as an upfront discount for interest charged by the bank, effectively giving you no extra The cost benefit has been given. The total amount paid by you will be equal to the invoice amount of your order to the bank”.
As per the terms and conditions of Flipkart’s BNPL offer on its website, “You acknowledge that as part of its marketing and promotional activities, FAPL shall, as a part of its promotional offers, charge interest on the Loan, if Anybody can pay / pay later. Products received by FAPL through Financing Partner for you.”
A 1%-3% discount may not sound promising to the customer, however, for a lender it presents a lucrative business opportunity. Therefore, instead of giving a small discount to the customers, the merchants pass this discount money to the financier. While on the surface an MDR of 0.75-2.5% may not sound like a big one, however, when you calculate it in terms of the annual interest rate, the income appears to be substantial.
| Actual Cost of BNPL Credit | ||
| Product price | 5000 rupees | Rs 4000 |
| customer pays | 5000 rupees | Rs 4000 |
| credit free period | 15 days | 45 days |
| merchant discount rate for the lender | 1% | 2.4% |
| lender’s revenue | 50 rupees | Rs 96 |
| monthly interest rate | 2% | 1.60% |
| annual interest rate | 24% | 19.2% |
Cost beyond credit free period
If you want to go for a longer repayment tenure, typically 15 days to 1 year, using a BNPL plan, the lender will offer the same through Equated Monthly Installments (EMI) options. Here, you have to pay interest and processing fee on your purchase. “We allow the customer to break the BNPL payment payable into multiple installments over a few months. To facilitate that, we offer 12 to 18% interest and a nominal processing fee,” said Krishnan Viswanathan, CEO and Founder, Kissht, One Moment Lending say fintech players.
HDFC Bank gives you the option to pay in 30, 60 or 90 days but it charges Rs 70 per month on purchases of Rs 3,000. This effectively means an interest rate of 2.33% per month or an interest rate of 28% per annum. Yogi Sadana, CEO, Kashi, an instant lending fintech company, says, “For its (Cash’s) BNPL offerings, its interest charges start from 0 – 0.75% per month, spread over 3 to 6 months. ”
If you go for the longer term, the interest rate will be much higher. An interest charge of 2.25% per month, which is 27% per annum, is levied by CASHe on its retail loan products ranging from 90 days to 1 year.
For example, if you convert a purchase of Rs 5,000 into EMI at 27% p.a. for six months, the total interest you will have to pay for this purchase will be Rs 401, which adds up to the total cost of the purchase. takes up to 5,401. .
The processing fee adds to the cost: Although some BNPL players like ICICI Bank or HDFC Bank are not charging any processing fee, however, many other lenders do charge a processing fee. “Processing fee charges for retail loan products from Rs 500 to Rs 1,200 or 2% for loan amount whichever is higher for loan products from 90 days to 1 year. PF fee for BNPL offerings starts from Rs 200. 600 Depending on the plan chosen by the borrower,” says Sadana.
Since the ticket size of these loans remains low on average, the processing percentage can be higher. “The typical processing fee for a loan varies from 3% to 5% of the loan amount,” says Viswanathan. So if the processing fee is 5% then you will have to pay Rs 250 to buy goods worth Rs 5,000.
The total cost that matters: Although the total amount of interest and processing fees may seem small, it will be much higher if you calculate the annual interest rate for the total cost of credit that you are paying. To buy goods worth Rs.5,000 for a period of six months at 27% p.a. interest rate, you have to pay a total of Rs.401 as processing fee of 5% and a total interest of Rs.250, so the total cost would be Rs.651 more That is, Rs 5,651. Though the total amount doesn’t sting you, but if you calculate, the annual interest rate of 44% might impress you.
Note the high cost of late payments: If you choose to buy something using the BNPL plan and default on the repayment, you may have to pay a penalty. “If the borrower fails to adhere to the repayment plan prescribed by Cash, interest is levied for the period when the customer’s amount is not paid,” says Sadana.
While the amount of the penalty can vary from lender to lender, late payment fees are mostly high. “Consumers can make repayment through cycles of 15 days. In case of inability to repay, users will be charged a penalty of Rs 15 every day. If there is a significant delay in payment, the consumer will not be able to pay for LazyPay services. Use anytime,” says Anoop Agarwal, Business Head, LazyPay, a BNPL lender.
There will be an additional cost in case of auto debit failure. “If there is not sufficient funds in the bank account on the payment due date, the Paylater customer shall be liable to pay all applicable charges in addition to the total dues generated in the next month’s account,” ICICI Bank’s Paylater said in the statement.
What should you do?
The best course of action is to buy from your savings instead of using the BNPL route. However, if delay in purchase is unavoidable then you may consider opting for BNPL.
For purchases less than Rs 10,000, the total cost of the loan may not be sufficient even at the higher interest rate in absolute terms. However, it is always better to compare the total cost which includes the total interest and processing charges that you will pay before making your purchase through BNPL option.
It is always better to go for only those purchases where you are sure of paying the entire due amount before the due date. If the purchase amount is more than the amount that you are able to repay within the free credit period, it is always better to go for EMI options and compare all the available options. Although the BNPL option is not without cost, however, when you compare it with the revolving credit of a credit card, the cost you pay with BNPL can be comparable and in many cases even less.