In India, Buy Now, Pay Later (BNPL) is a form of short-term financing that enables customers to pay for their purchases in installments within a specified timeframe. The surge in popularity of BNPL service providers can be attributed to the COVID-19 pandemic. With lockdowns leading to a rise in demand for e-commerce services and consumers seeking to break down larger expenses into interest-free Equated Monthly Instalments (EMIs), BNPL has emerged as a popular option. Many online merchants and fintech companies offer BNPL as a convenient payment option, which is becoming increasingly popular among consumers as it provides an alternative to credit cards. With its accessibility, transparency, and no-cost EMIs, BNPL has the potential to revolutionize the lending industry in India.
BNPL services have become popular in India as they provide greater financial flexibility to consumers who may not have access to credit cards or other traditional forms of financing. However, it is important to note that BNPL can also lead to debt and financial stress if not used responsibly. Therefore, consumers should carefully evaluate the terms and conditions of BNPL services before using them and ensure that they can make timely payments to avoid incurring additional fees or interest charges. This article throws light on everything you need to know about the BNPL concept.
In India, there are several companies that offer BNPL services, such as ZestMoney, Simpl, LazyPay, Paytm Postpaid, Amazon Pay Later, Epaylater, Flexmoney, Ola Money Postpaid and Capital Float. These services allow consumers to make purchases on various online platforms and pay for them later in installments, with or without interest, depending on the service provider and the specific terms of the offer.
Opting for a BNPL option to finance a large purchase is similar to taking out a personal loan, as both allow you to break down your payments into equal installments over a period of a few months. However, BNPL loans usually do not accrue interest as long as you meet the requirement of making your payments on time and in full. This sets them apart from traditional personal loan and credit card purchases that typically charge interest on any outstanding balances.
How does BNPL work?
BNPL is a type of installment loan where the amount spent is paid back in EMIs within a set repayment tenure. Interest is charged on the amount after a certain period and a penalty is levied in case of failure to pay on time. Interest is charged on BNPL based on various factors such as the amount spent, repayment tenure, and credit score. However, some companies offer a credit-free period and if you repay the amount within that time, no interest is charged.
Most BNPL companies do not charge interest if the payments or EMIs are made on time, but if not, a significant interest charge is levied, which can often be higher than that of a personal loan. While none of these companies charge an annual fee, a few may have a joining fee.
The BNPL option can be used for both online and offline purchases. For online purchases, you can use the facility to make instant payments. For Point of Sale (POS) transactions, you can simply scan the QR code and complete the payment without entering any pin or OTP. However, the merchant should have BNPL as a payment option. Payments for purchases made using the BNPL option can be made using bank transfers, cheques, credit cards or debit cards.
BNPL service providers generate revenue from both merchants and customers. When a customer uses the BNPL facility to make a purchase, the merchant pays a fee to the BNPL service provider. Additionally, BNPL service providers can generate revenue through marketing and promotional activities, as increased traffic and conversions for merchants may translate to increased fees paid to the BNPL service provider.
On the customer side, BNPL service providers can charge interest on the amount borrowed, which typically ranges from 10% to 30% based on factors such as credit score and repayment tenure. However, if the customer repays the amount on time, no interest is charged. Late fees may be charged if the customer is unable to repay the amount on time, which adds to the revenue generated by the BNPL service provider.
Several private sector banks such as HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra, etc. are offering the BNPL facility to their customers.
Eligibility criteria for BNPL:
The eligibility criteria for BNPL may vary depending on the service provider. However, here are some general eligibility requirements that are commonly used:
Age: You must be a Resident Indian above 18 years of age to be eligible for BNPL. However, different BNPL service providers may have different minimum age requirements.
Income: Most BNPL providers require that you have a regular source of income to be eligible for their services. The specific income requirement may vary, but some providers require a minimum monthly income.
Credit history: Some BNPL providers may check your credit history before approving your application. However, this is not always a requirement, as some providers offer BNPL to consumers with no credit history.
KYC documents: You may be required to provide Know Your Customer (KYC) documents such as Aadhaar Card, PAN, or passport to verify your identity and address.
Participating merchant: You must make a purchase from a participating merchant to be eligible for BNPL. The list of participating merchants may vary depending on the BNPL service provider.
How are BNPLs different from Personal Loans?
Personal loans and BNPL are both financial products that allow consumers to make purchases or pay for expenses. However, there are some key differences between the two:
Interest Rates: Personal loans usually have a fixed interest rate that is charged on the entire loan amount, while BNPL may offer no interest or low-interest rates for the installment payments. However, if you miss the repayment deadlines in BNPL, you may be charged interest and penalties. It is however recommended to evaluate the costs associated with both options before deciding which one to use.
Borrowing Limit: Personal loans typically have a higher borrowing limit than BNPL. The amount you can borrow through BNPL is usually limited to a smaller amount, which is determined by the BNPL service provider.
Repayment Terms: Personal loans have a fixed repayment term, which could range from a few months to several years. BNPL, on the other hand, offers flexible repayment terms, allowing consumers to choose their preferred repayment plan and adjust it to their financial situations.
Approval Process: Personal loans require an application process that may involve a credit check and other documentation. BNPL, on the other hand, usually does not require a credit check and may have a simpler and quicker approval process.
Usage: Personal loans can be used for a variety of purposes, including debt consolidation, home renovation, or major purchases. BNPL is generally used for making purchases from participating merchants. Thus, personal loans may be more suitable for larger expenses with longer repayment periods, while BNPL may be a more flexible option for smaller purchases that can be paid off over a shorter period of time.
Advantages of BNPLs:
1. Increased affordability: BNPL allows consumers to spread the cost of their purchases over a period of time, making it more affordable for them. This is particularly beneficial for expensive items that may be difficult to pay for in one go.
2. Minimal or no interest: Many BNPL providers offer no interest or low-interest rates for the installment payments. This means that consumers can pay for their purchases over time without incurring additional interest charges.
3. Convenient and Simple Structure: BNPL is a convenient payment method that allows consumers to make purchases without having to pay upfront or use a credit card. It is an easy and straightforward process that can be completed online, without the need for physical documentation. Thus, for online shoppers, BNPLs offer an easy way to purchase desired items, providing immediate satisfaction.
4. Flexibility: BNPL allows consumers to choose their preferred repayment plan and adjust it according to their financial circumstances. This can help consumers manage their finances more effectively. Moreover, a BNPL option can aid in managing your cash flow as it allows you to buy what you need while adhering to a payment plan that suits your budget.
5. Access to credit: AS BNPLs do not involve a hard credit inquiry, they can be a useful tool for consumers who do not have access to traditional credit products like credit cards or those who may not have a strong credit history. Having a good credit score is essential for obtaining a higher credit limit. While BNPL options are available to people with poor credit scores, regular usage and timely payment of EMIs can gradually increase your credit limit.
Limitations of BNPLs:
1. Varying Terms: It's important to be aware that the terms and conditions of a BNPL loan can vary and therefore it's essential to understand the details of the deal before agreeing to it. For instance, while the loan may offer 0% interest, this promotional rate may not last the duration of the loan, resulting in expensive finance charges. Additionally, there may be hefty penalties for missing or skipping payments.
2. Fixed fees: Certain BNPL programs have fixed fees that are added to the monthly payments, which can increase the overall cost of the loan compared to purchasing the item outright.
3. Don’t help build credit: It's worth noting that while making on-time payments on a BNPL loan does not help build your credit, late payments can negatively impact your credit score if reported to credit bureaus. Failure to repay the BNPL amount can result in a significant amount of debt, as interest will continue to be charged on the amount. It can also lower your credit score, making it difficult to avail loans or credit cards in the future. Non-payment may lead to the denial of future BNPL facility usage or a higher interest rate if allowed.
4. Overspending: Using a BNPL option can encourage consumer overspending as the ability to pay off a purchase over time can make it appear more affordable than it actually is.
What should you do?
It is generally advisable to purchase items using personal savings instead of relying on BNPL options. However, if postponing the purchase is not feasible, then opting for a BNPL plan can be considered.
If the purchase cost is below Rs 10,000, the overall cost of credit may not be significantly high, even if the interest rate is higher. Nevertheless, it is recommended to compare the total cost, including the processing fees and interest, that you will be paying before utilizing the BNPL option for making your purchase.
It's advisable to only make purchases using the Buy Now, Pay Later option if you are certain that you can pay the full amount before the due date. In case the purchase amount is more than what you can afford to pay within the free credit period, it's better to consider EMI options and compare various available choices. Buy Now, Pay Later options can be a helpful way to ease the burden of a significant purchase. It's also important to ensure that you have the capability to pay off the loan promptly to avoid incurring interest charges and late payment fees.
Conclusion
The future of BNPL appears promising, as it will likely attract more customers who seek to purchase their desired items instantly. With most lenders offering no-cost EMIs for repayment, it may become the preferred payment option, particularly among the younger generation. While the benefits of BNPL are evident, it's important to remember that it is still a loan that must be repaid by the customer and therefore should be approached with caution. Lenders offering this service will need to exercise caution in providing this facility, as not all customers may be able to repay the amount within the specified time frame. While BNPL approvals may be easy to obtain, failing to make payments on time can negatively impact your credit score. Therefore, like any other loan, it's crucial to make timely repayments to maintain a healthy credit score.
Comments