Buy now and pay later, popularly called BNPL, is a form of unsecured credit gaining traction especially amongst millennials and Gen-Z. BNPL users get online point of purchase small-ticket loans almost instantly with an option to repay in future. For consumers, BNPL offers the opportunity to get loans at zero cost if debt is cleared with the due date. However, given the proliferation of BNPL offerings and easy access to such loans, there is always the risk of debt problems if you are less careful. Here are key points to note before you dip your hands.

BNPL arrangement

Just because you can get BNPL loans at no or a negligible rate, doesn’t mean this is free money. BNPL platforms source the funds from a bank or NBFC and lends it onward to borrowers for buying goods and services from merchants. For instance, Paytm BNPL has tied up with lenders like Aditya Birla Finance. The lines separating the platform and merchant may get blurred in some cases; for example, Amazon Pay Later is a BNPL platform of Amazon India, which is also a merchant.

BNPL providers are essentially a marketplace lender (MPL) or a marketplace aggregator (MPA). The platform allows transactions between lender and borrower, but does not intend to carry the loans on their own balance sheet. Hence, when you give consent to a BNPL offering, don’t get surprised if your credit report shows a loan from a third-party lender.

Charges, fees

BNPL providers give you interest-free loans, if the dues are paid within the scheduled date. If not, be ready to shell out 10-30 per cent interest based on credit score, repayment tenure etc. The borrower should keep a track of expenses and use the facility judiciously to avoid significant burden of debt. BNPL loan is a line of credit and therefore the cost of funds will be high. If you do not clear the outstanding dues within the free-interest period, you may be liable to pay late fee. BNPL platforms may also charge convenience fees (1-3 per cent on monthly spends) even as activation may be free of cost. Borrowers may choose to opt for EMI (equated monthly installment) option also; they must look into the schedule and check the interest being charged. It is advisable for borrowers to try to repay the debt in advance as unsecured loans may weigh down your credit history.

Consequences of default

In case a BNPL borrower defaults, here is what happens:

First, economic costs such as late fee will be imposed. For instance, Flipkart charges ₹60 as penalty for default in payment of ₹100-500 and the highest penalty charged is ₹600 for default of ₹5,000 or above. Amazon Pay Later charges no late payment on default below ₹200, but charges penalty ranging from ₹100 (plus GST) to ₹600 (plus GST) according to outstanding amount.

The flip side
If dues are not paid within the stipulated date, be ready to shell out 10-30 per cent interest based on credit score, repayment tenure etc.

Second, the moment the lender decides there has been a default, the entire outstanding balance becomes immediately due and payable by the borrower. The lender is also free to initiate and pursue any actions/proceedings as deemed necessary for the recovery of the dues.

Third, when the lender reports defaults to the credit bureau, this will impact your credit score, which makes borrowings in future costlier as lenders across the board price in higher credit risk.

Illegal apps

BNPL is a relatively-new business model. Therefore, there are quite a few grey areas on the regulatory front, which has led to the rise of many illegal BNPL apps. The RBI has identified nearly 1,100 apps as illegal (from January 1, 2021, to February 28, 2021). Hence, one must be careful before interacting with any platform. Such illegal apps may either steal your data and misuse it or even charge usurious interest rates and also load your bill with hidden charges.

All borrowers should go through the loan/credit agreement/terms and conditions etc., weigh pros and cons and understand the consequences before going forward. One should only deal with BNPL offerings from trusted/recognised brands. In addition, try to find out details of the lending partner (NBFC or bank) in the BNPL platform and check their antecedents on the RBI website. Usually, fake BNPL apps will not be transparent about their dealings and representatives of such platforms will get uncomfortable when asked to furnish legal documents.

Financial discipline

While BNPL is preferred due to the loans being affordable for borrowers, easy credit can spoil habits. Just because you have access to BNPL loans, does not mean that you should go for impulsive spending. Buying groceries or ordering food online by using BNPL loan is not an ideal thing to do. Unknowingly, you may start taking credit for trivial purchases since you know you can pay for them later.

Therefore, it is important for borrowers to look at the flip side of the coin before taking a decision. Yes, BNPL loans are easy to obtain credit and there is not much fuss about documentation or credit history. However, since money is involved, borrowers must exercise caution and implement financial discipline.

(with inputs from Kumar Shankar Roy)

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