- Date : 21/05/2022
- Read: 4 mins
Buy Now Pay Later is the full form of BNPL. According to Investopedia, it is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often perceived as interest-free payments. These schemes are also referred to as "Point of sale instalment loans". But if you are unable to pay within the no-interest period, you will be charged interest rates on loan.
If you have shopped online in the recent past, you must have seen the term Buy Now Pay Later or BNPL flying around on platforms like Paytm, Amazon, LazyPay, Simpl, etc. Maybe you already have purchased an item on the scheme. The popularity of these pay later schemes has skyrocketed during the pandemic with lost jobs.
Many Indians who choose this scheme are millennials, and the reason behind this choice is the enticing low barrier to entry. It helps them establish a credit history. Freelancers or self-employed professionals also prefer these schemes for flexibility and affordability. The Indian BNPL market alone is expected to grow to $50 billion by 2026, according to a study done by RedSeer. This number is only expected to rise in the forthcoming years. The ease of access makes it easy for consumers to splurge and spend more than they make.
Also Read: 5 Ways to make saving money fun.
What is BNPL?
BNPL stands for Buy Now Pay Later. According to Investopedia, it is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. This scheme is also referred to as "point of sale instalment loans". There are two common types of payment schemes, namely payment and transaction finance schemes.
Payment finance schemes allow you to accumulate all your bills in one place and pay later within 15 days at no interest. You don't need to enter your credit card or use any money upfront. Suppose you don't want to make smaller payments throughout the month and would rather pay everything in one go. This is a great option if you want to build up your credit score.
Once you make regular payments and build a decent score, you are eligible for multiple offers like credit cards and small consumer and personal loans. You can buy an expensive item using multiple easy payment options through these schemes. You can pay smaller EMIs over a duration of time.
But what happens if you don't make a payment on time? There is no one rule that fits all policies in terms of collections, as each company follows its own. Here are three possible charges to keep in mind:
1. Processing costs
Most BNPL merchants charge a processing fee to process the transactions. These charges are usually up to 2% of the loan amount or item value. Even though it is a small percentage, you pay the extra amount as a tradeoff for affordability. Most consumers usually overlook these costs as they lack awareness of the disclosures for these schemes.
2. Late payment charges/Late fees
Late charges or fees are applied to the loan if the consumer is not able to pay on time. These fees can be charged daily, like some platforms charging Rs 15 every day.
The fees can also be charged according to the amount you owe. For example, Ola Postpaid charges Rs 50 for Rs 250 to 500 and Rs 75 for Rs 501 to 1000. If the dues are not cleared in time, it will affect your credit history significantly if you are just getting started with credit.
3. Interest rates
Even though BNPLs are available at the touch of a button, it's crucial to remember that they are still loans and have interest charges. If you are unable to pay with the no-interest period, you will be charged interest rates on the loan.
The rate depends on various factors such as the amount spent, repayment term, credit score, etc. Most BNPL companies charge up to 24% annual interest on these schemes.
Buy Now Pay Later schemes can be beneficial due to the ease of payments and affordability. But it would be a mistake to misuse this facility for impulse purchases and buying things you cannot afford. Consider these three risks of missing a BNPL payment before you make up a decision.
What happens if the customer does not pay beyond a specific period, like six months? What action can be taken?
The representative of the respective company will pay a visit to the house/office of the user and try to collect the principal and interest. If the user does not cooperate, legal notice might be sent to the user, followed by a court hearing.
