If you’ve been doing a lot of online shopping, you’re bound to have noticed that the check-out portals of many e-commerce websites, mobile applications and even banks now offer an option of paying later.

OLA’s Postpaid, or Amazon’s Pay Later, or HDFC Bank’s FlexiPay, are all examples of a now in vogue short-term financing facility called Buy Now Pay Later (BNPL).

What is it?

BNPL is a short term credit facility extended by banks directly or retailers (through their tie-ups with banks and NBFCs), that allow consumers to defer payment on their purchases for 15 to 365 days.

Depending on the service provider, the interest-free period may vary from 15-30 days, beyond which the customer can repay in a single shot or in EMIs spread over 1-12 months.

Unlike the paperwork for traditional loans, customers can enrol for this credit facility almost instantly using their mobile phones, by finishing basic e-KYC procedures. In most cases, the e-KYC procedure doesn’t involve a video authentication, so the RBI has mandated that the loans disbursed shall be term loans, for a maximum tenure of 12 months, capped at ₹60,000 a year, unless the customer upgrades to full KYC.

Why is it important?

Besides providing easy access to credit and boosting the sales of white goods and other consumer goods, BNPL also helps lenders explore new borrowers who wouldn’t ordinarily come to them for a loan. For instance, Amazon offers customers a BNPL service called Amazon Pay Later through its tie-up with CapFloat Financial Services and IDFC First Bank.

After completing the e-KYC procedure, customers are approved loans by the partner lender, basis their credit bureau history, which can then be utilised for purchases on Amazon.in.

HDFC Bank, on the other hand, directly offers its savings and current account customers, FlexiPay option, which they can use on purchases with partner merchants (including FlipKart, MakeMyTrip, Myntra, Metro Shoes, Royal Oak Furniture and Bunayi).

The approved loan amounts (within the RBI limit), interest rates, pre-closure charges and other terms and conditions vary with each service provider.

For instance, in the case of Amazon Pay Later, for opting to pay the next month, customers are not charged any amount, whereas interest applies when one opts for EMI payment (ranging from three to 12 months). The minimum and maximum loan disbursed under Amazon Pay Later further varies according to the payment schedule opted for. For instance, for those who opt to pay next month (interest free) only up to a maximum of ₹10,000 is sanctioned, whereas one can borrow anywhere between ₹3,000 and ₹30,000 while opting to pay back in three month EMIs and between ₹6,000 and ₹60,000 while opting for six month EMIs.

In the case of HDFC Bank’s FlexiPay, the sanction amount can range from ₹1,000 to ₹60,000, wherein there is no extra cost (interest or fees or other charges) on payment within 15 days. Beyond this, customers can choose an auto-debit repayment scheduled in 30/60/90 days, with interest charges of ₹70 per month on a purchase of ₹3,000.

Why should I care?

If you don’t own credit cards, BNPL offers you a similar free credit period without the hassle of having to get one, subject to loan limits.

While tapping into it is easy, one must remember though that BNPL is just another form of credit offered by lenders and one must assert utmost caution before assuming any kind of debt.

BNPL transactions seem hassle free when compared to a regular loan approval process of a financing institution or a credit card purchase. Besides the digital only enrolment, BNPL also varies from a regular credit card purchase or a regular personal loan, on the low ticket size and comparatively lower interest rate charged.

While credit card providers charge 32-48 per cent per annum, the rate of interest on BNPL works out to be lower (in the range of 28 per cent in the case of HDFC Bank’s FlexiPay). Besides, BNPL loans do not entail any processing fee or other on-boarding charges.

However BNPL providers do levy additional charges such as late payment fee and pre-closure charges. While Amazon Pay Later has waived pre-closure charges, Pre-closure of HDFC’s FlexiPay service will currently attract a charge of 4 per cent on the balance principal outstanding plus GST (at the rate of 18 per cent). Upon missing an EMI payment, there could be auto debit reversal fees or penal charges.

The bottomline

Make sure too much of BNPL does not drag you to BPL (below poverty line).

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