New-age consumers are constantly on the lookout for simplified credit solutions that have an easy and seamless application process. These are mainly required for better management of regular and occasional expenses. These ever-evolving demands have led to the sudden surge in popularity of Buy Now Pay Later or BNPL schemes in India in the past few years.
With a greater number of focused start-ups, e-commerce giants and many leading banks starting to offer BNPL services in India, there is considerable progress with regards to customer onboarding, merchant tie-ups and investment growth.
To help choose between BNPL, credit cards and personal loans, let’s begin by understanding more about BNPL before we explore the key differentiating factors between the three.
What is BNPL?
A BNPL service lets customers make eligible purchases that can be split into instalments or can be repaid on a future date (as per the repayment cycle) at nil-to-low interest fees. BNPL service providers provide customers with short-term micro-loans to make specific purchases that generally start at Rs. 2,000 and can go up to Rs. 1 lakh within credit limits. The repayment cycles can range between 14 to 30 days (in some cases a maximum of 90 days) depending on the terms laid out by the service provider.
Late payment fees (and interest charges, if any) may be levied for repayments that are made after the due dates. BNPL providers may also report late payments to credit bureaus which can potentially impact the credit scores of users.
How did BNPL services gain popularity?
BNPL services are known to be a part of the worldwide digital lending ecosystem for more than 15 years now. However, the Covid-19 pandemic has resulted in a stimulus for its massive growth in recent years due to the rise in e-commerce. Additional factors that have resulted in the rise of BNPL include wider mobile internet availability and increased redundancy of cash transactions in countries such as China, the USA, Australia, India, etc.
The BNPL service providers mostly adopt new-age methods for evaluating an applicant’s creditworthiness. The process of customer onboarding and sanctioning of credit limit is conducted digitally within a matter of minutes and it requires minimal documentation. Some service providers also offer pre-approved BNPL credit limits to a few customers depending on their credit standing.
BNPLs are currently available at many e-commerce, food-ordering, travel booking, ride-sharing, online grocery stores and other services websites. These can also be availed at Edu-tech portals among multiple other merchant platforms. BNPL transactions can be conducted seamlessly at checkouts. These are safe and secure one-tap solutions that do not require users to enter card details or OTPs.
Some BNPL service providers provide customers with extra incentives in the form of additional cashback and discounts in return for availing their facilities. These are also offered against timely repayments or for conducting specific transactions. Most instant funds-offering platforms generally earn through various merchant commissions and late fees as against interest charges.
Comparing BNPL with personal loans and credit cards
Let’s have a look at some of the differentiating factors of BNPL, credit cards, and personal loans:
BNPL v/s credit cards
- Credit cards have an advantage over BNPL since they are universally accepted while BNPL is still restricted to partner merchants.
- Credit cards offer various perks and privileges to help users save more and gain access to a premium lifestyle through certain transactions.
- Cards may come with higher spending limits although these can be tougher to obtain due to more stringent eligibility terms.
- BNPLs don’t include any annual, processing, or renewal fees, whereas cards may include these.
- The interest charges on BNPL services have to be paid in the form of non-cumulative fees for late payments. In credit cards, however, the users can also avail themselves of zero-interest EMIs.
BNPL vs personal loans
- Personal loans are substantial and can be used for any purpose. These unsecured financing options offer credit limits that are much higher than BNPL services. However, higher interest rates apply to personal loans, unlike BNPL.
- BNPLs offer revolving credit whereas personal loans do not. Additionally, a customer’s age, credit score, income, occupation, etc. are closely scrutinised by the lenders while ascertaining loan eligibility. The application and loan disbursal processes are fast for pre-approved loans.
- BNPLs often use modern methods to determine a borrower’s creditworthiness, and are usually short and quick.
Credit cards offer a wide range of benefits, universal acceptability and higher credit limit combined with cumulative interest charges on late payments. BNPL services, although smaller, are far simpler credit facilities designed to benefit consumer purchases made at partner merchants. These involve EMIs with no interest charges and a one-time fee in most cases. These factors make them preferable for users aiming for short-term micro-credit facilities and those ineligible for credit cards.
Personal loans are for one-off but large financing needs during emergencies and are not meant for smaller discretionary spending since these involve high-interest charges. BNPLs, credit cards and personal loans can be termed as three different types of loans, however, each must be used in a disciplined manner. Users must never over-borrow and read the fine print carefully while ensuring that their dues are paid on time to maintain good credit standing.
BNPL, credit cards and personal loans are some credit facilities with unique features, benefits, and charges. It’s advisable to use them only after careful contemplation.
Know the key differences between BNPL, credit cards and personal loans