Festive shopping often means festive borrowing. When borrowing, you should know your options so that you minimise costs of borrowing and maximise benefits. Credit cards and personal loans (PLs) have been around for a while now. There’s now a relatively new option – Buy Now Pay Later loans (BNPL). These are becoming popular among young, new-to-credit consumers as well as experienced consumers who need some help managing their payments after Covid-related financial stress. Let’s take a deeper look at this option and how it compares as a financing tool for festive shopping.

What it is

As the name suggests, a BNPL loan can be used to pay for your shopping. The dues can be repaid in a few days without any charges. BNPLs can be availed from fintech companies, lending start-ups, and some banks. Think of a BNPL like a tab you have with your grocer who allows you to make purchases on credit which you must settle at the month-end in one shot for which you may even get a little discount. BNPL features vary from one lender to another, but they all broadly provide the same convenience: of shopping now and paying after a few days.

BNPLs are small loans – in many cases, as small as ₹2000 to ₹5000. You can sign up for them with your preferred BNPL provider, an e-commerce platform, or a bank. In many cases, credit scores are not a barrier to BNPL access. Once availed, you can use your BNPL balance with a partner merchant. Both BNPLs and PLs are easy to get. You could apply online and get one quickly. Pre-approved offers can be availed almost instantly. So can credit cards. But the similarities between the three end here.

Credit cards can be used offline or online, and even as cash, domestically or internationally. PLs are credited to your bank account to be used in any manner you like, even as cash withdrawals. Therefore, these two options have universality. So far, you can use a BNPL only with merchants that the financier has partnered with domestically. For example, you may use a BNPL as a payment option on a food delivery app. BNPLs also don’t permit cash withdrawals. That said, loan providers and merchants are partnering rapidly to make BNPLs more widely usable. But for more seasoned borrowers, credit cards may satisfy a wider range of financing needs.

Quantum, borrowing costs

BNPLs start from a few thousand rupees and go up to ₹1 lakh in a few cases. Therefore, they are good for small-ticket purchases ranging from grocery, food deliveries, and cab rides to small electronics. Some BNPL providers will enhance your spending limit basis your credit behaviour. Timely repayments help. On the other hand, credit cards have spending limits as high as your income and credit profile allow it to be. PLs normally start from around ₹50,000 and go up to ₹40 lakh in a few cases. BNPLs are an excellent initiation to loans for new-to-credit consumers. But those eligible for credit cards may go straight to them instead. BNPLs are suited to small shopping.

This is one area where BNPLs appear most attractive. They have near negligible sign-up charges, no processing fees, or even annual renewal charges. In most cases, dues attract no interest though interest will typically apply on EMI plans. Late payments attract penalties. Credit cards may have joining or annual fees, though many cards waive these off for preferred customers or customers who achieve spending milestones.

However, card debt is not cheap, with annualised interest rates sometimes exceeding 40 per cent. Late payment penalties will be additional. PLs typically have processing fee, which can sometimes be waived off or discounted. Interest rates start from around 7.50 per cent, which make them cheaper than credit cards for large borrowings.

Tenure

BNPLs are excellent for no-charge, small-ticket transactions for the very short term. The typical BNPL needs to be paid back between 15 days to 90 days, though larger BNPL loans may go up to even one year. A credit card is suited for bigger purchases though the high rate of interest means you should ideally pay your card dues off in the short run – ideally no more than a few months. But if you need to borrow big and need a much longer tenure to pay off the dues, you should take a PL which can have a tenure between one and five years.

BNPLs, like credit cards, provide revolving credit. You can spend from your limit, replenish it by repayment, and use it over and over. PLs are fixed credit lines. Despite the differences, all three options are easily available to eligible consumers. Where credit is easily accessible, care should be exercised with repayment. Late or missed payments will wreck your credit score in all three options. Therefore, borrow only what you need, always repay your dues in full, and for best results with your festive shopping, always stick to a budget.

The writer is CEO, BankBazaar.com

This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.

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