Hyderabad: Many of us tend to visit the same store in the neighbourhood due to the trust we enjoy with each other. At times, they extend a small credit without any interest and want us to come back to the store. The interest-free credit is a reward for the customers for being loyal.
Based on the same principle of offering interest-free credit to customers is the Buy Now Pay Later (BNPL), a rapidly growing short-term credit channel. The interest-free facility, extended via partners, helps businesses as it lures people to complete a purchase, which otherwise would have been dropped or postponed to due to shortage of cash. It is now popular with Paytm, Ola, Amazon and Flipkart, banks like Axis, ICICI and others. There are also fintech players like Simpl, ZestMoney, LazyPay, Flexmoney, EPayLater and Capital Float among others. It is also available by buying the agriculture inputs.
BNPL is mainly targeted at those who still do not have a credit card. BNPL lenders do the credit assessment through alternative tools like the purchase history and payment behavior with the merchants. Mobile, vehicle ownership and others are also considered. They use analytics to determine their spending limit. BNPL is suited for small-ticket purchase like gadgets, apparels, food delivery, travel booking, grocery and other spends ranging from Rs 500 to Rs 30,000.
To access the BNPL, the users have to complete the KYC on the providers’ platform. This is for the salaried and the ocuments needed include a photo ID and address proof and bank details. The arrangement could be exclusive to its merchant partners.
Typically, the credit has to be repaid in a fortnight to 45 days. The tenure increases with the loan amount The flexibility of paying in small amounts will lure people into spending more than what they really should. There is no interest if repaid before the due date. Past that the interest rate could be upto 30 per cent and could inlcude a penal fee as well. BNPLs should be used with caution. Defaults will affect the credit scores as the BNPL loans are reported to the credit bureaus. Since the credit score will be affected due to defaults, the future loans will be offered at a higher rate of interest or the loan might be rejected.
Win-win for lenders, merchants
Sellers pay BNPLs a fee ranging between two per cent and 8 per cent of the purchasing amount if the customer uses the BNPL facility. BNPL players make money from customers in from of processing fee and penalities along with an interest going up to 30% in case of defaults. As long as the amount is repaid on time, no interest is charged.
BNPL creates a credit and repayment history, which will impact on the future creditworthiness. Prompt payment will lead to enhanced credit limits and vice versa on future purchases.
BNPL, credit cards and personal loans
Credit cards are universal acceptable, have a higher limit and offer points or rewards which can be redeemed. However, they are tough to access and have cumulative interest charges. Personal loans are bigger in size and attract a higher interest. They are suited for emergencies and not for day-to-day purchases. The BNPLs are smaller credit facilities for consumer purchases from partnering merchants.
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