Buy Now, Pay Later Loans – Boon Or A Bane?

BNPL, or buy now pay later loan, is a new credit scheme that gives consumers the power to buy a product immediately even if they do not have the full funds to make such a purchase. This product is similar to having an unsecured personal loan at your disposal that you repay in time through EMIs.

Why and how has this new credit form, BNPL, seen such great success in a short time?

Consumers’ purchasing habits are changing, and so are how they decide to pay for the same. The pandemic has surely contributed greatly to people moving toward contactless and cashless modes of payment. This new form of easy credit has gained popularity and easy acceptability in no time.

The name Buy Now, Pay Later is so luring that it is easy to fall bait to this scheme. This Pay Later Loan is like an instant upgrade on one’s credit limit without having to go through any hassle of proving your credit worthiness or going through cumbersome documentation. The buying process is super simple and seamless for customers with the BNPL loan scheme at their disposal.

How exactly does a BNPL loan scheme work?

BNPL is a payment option that promotes the mantra ‘get a loan now, pay later’. It enables the person to make a purchase even if he does have immediate funds to release for the same. The customer creates his shopping cart and, at checkout, chooses the company he wants to opt for that provides a BNPL loan. This company then pays for the same on behalf of the customer to the seller within 48-72 hrs. The customer must repay the same gradually over a specified period through EMIs.

In simple words, getting a BNPL loan is like a fast-paced credit facility that allows one to apply for an instant loan without worrying about detailed clauses and terms and conditions. E-commerce portals promote this credit option with the support of fintech firms. It is a great way to support purchasing, which helps create good demand in the economy, which is imperative for growth and development.

How is it different from a Personal Loan?

In the case of a personal loan, one needs to arrange for funds prior and then wait for them to be realised after sanction to use the same for a particular purpose or purchase. The Pay Later loan scheme works oppositely. Here we see that the consumer chooses what he wants to purchase, and then, if he is short on funds, he can opt to make the purchases using the BNPL payment mode. This way, the selection or action of deciding what one wants happens before, and the arrangement of having the support of adequate funds for the desires happens after.

What makes BNPL loans a boon?

Most consider this new credit facility a boon, primarily for its ease of usage. Some reasons that make this payment plan highly attractive include:

• The amount required to make purchases is instantly taken care of.

• For users who do not have a very strong credit history and are new as credit borrowers, this is helpful to get started without any complications. Besides this, the discipline they show to repay the amount helps create a good credit history record for the future.

• The consumer gets the facility to pay for the product over the next few months without postponing the purchase.

• The repayments are made directly through the bank, so only a one-time effort of linking the bank account is required and then automated monthly deductions are made for repayment of amounts.

• While credit cards have many hidden charges, the costs associated with the BNPL scheme are more transparent.

• Personal loan interest rates apply instantly, and credit card payments are also free from interest for a very short time. In contrast, the BNPL scheme provides interest-free repayment for a longer time.

• BNPL is like quick loans, which are way easier to get when compared to credit cards or personal loans.

What makes the BNPL payment mode a bane?

The merchant fee charges on BNPL transactions are higher, and both banks and credit providers charge their fees for the execution of the transaction.

• This credit payment mode is quite convenient, and people get easily lured towards it without thoroughly understanding how it adds to their fixed monthly obligation and increases their credit load.

• Timely repayment of such a loan will not help improve the person’s credit score, though, in case of a default, the same will hamper the personal credit rating and get rejected when you apply for a new credit card or personal loan later.

• It is another payment mode that acts as an additional line of credit and makes people add on to their burden of loans and repayment schedules.

• It is a relatively risky mode for lenders, as a detailed and in-depth background check is not carried out for the customers opting for the BNPL payment mode. Risk modelling is the tricky aspect of BNPL, so if not done well, it can weigh heavily on lenders in the form of defaults and bad debts.

The Future of BNPL

The BNPL scheme is getting easy acceptance from the millennials and Gen-Zs, who believe and are most comfortable with cashless and easy credit modes of payment. The years ahead look bright for this new form of credit, and the growth and confidence in this scheme are expected to increase with time. The BNPL system, though, cannot be seen as a substitute for credit cards as it has a lower limit and can only be used to make purchases online with merchants that have this facility on their portal. The no-interest period attached to the purchases done using BNPL loans make this form quite attractive for both credit cards and non-credit card users.

Tips to ensure this scheme remains a boon for you

An easy credit facility can lead to impulsive buying, and one may realise the overspending only after doing it all. So, to avoid this, one must set a limit and budget in mind beforehand to tread with caution and stick to spending only as much as can be managed without making defaults.

Stick to using such a scheme for the essential items. This is another way that can be useful to ensure that you don’t end up adding to your credit burden for things and purchases that you could have easily delayed.

Use it well and make the repayments quickly to build up a good credit record. This is a great way for young users to have a good track record to prove their credit management abilities. Such a record can help build a good credit score that can work in favour of the person while applying for personal loans in future too.

So, we see that the BNPL scheme is surely a great credit payment mode, but only until the users know how to manage and repay the outstanding amount in a timely and well systematic manner.