The pandemic and festive season have significantly augmented the buy now, pay later (BNPL) services. Presently, people are more aware of the BNPL due to its convenience factor, and online shopping has nudged its awareness. Let’s take a look at what is BNPL and in what ways it differs from credit cards:
BNPL or Buy Now Pay Later, is a method of payment that allows you to purchase without having to pay immediately. Generally, you sign up with a company that provides this service, which pays you when you make a purchase.
However, if the lender makes a payment on your behalf, you must repay the loan within a certain time period. You can pay it in one lump sum, or no-cost Equated Monthly Installments (EMIs). If you do not repay the loan within the specified repayment period, the lender may charge you interest on the outstanding balance. Further delay could have a negative influence on your credit score.
Thus, how does purchasing something with a credit card compare to purchasing something using the Buy Now, Pay Later work?
Most BNPL lenders provide an interest-free credit period on these plans, similar to how credit cards do. A credit card allows you to divide your purchase into equivalent monthly instalments (EMIs) over a period of time, usually up to 12 months (sometimes for longer, like three years).
Similarly, you can receive this facility from BNPL lenders at the time of purchase to covert the payment into EMIs (typically for a short duration). Some BNPL lenders allow you to pay in EMIs for extended periods, such as 3 to 12 months. However, keep in mind that not all BNPL lenders allow you to convert your payment into EMIs. One needs to check with the lender or read the terms and conditions.
Unlike credit cards, which typically have a 45-day interest-free credit period, BNPL’s interest-free credit duration is usually only 15 days. Certain BNPL lenders, on the other hand, now provide interest-free periods of up to 45 days. In fact, some even offer interest-free periods that are longer than others.
BNPL interest rate can go up to 24%, and credit card interest rate can go up to 48%. Further, getting the approval can take some time when it comes to credit cards, whereas the borrower gets easy approvals when it comes to BNPL.
Credit cards come with a lot of hidden charges when it comes to the pricing model, whereas BNPL runs on a transparent and low-cost pricing model. That said, credit cards are more flexible when it comes to merchant acceptance, while BNPL services are available only with the selected e-commerce platforms and fintech organisations.
BNPL’s future might be quite bright, as the concept will attract more customers who will be able to instantaneously purchase an item of their choice. Most lenders who offer this facility offer interest-free EMIs, which are anticipated to become the preferred payment option in the future, particularly among the youth.
However, at its core, it is still a sort of loan that the consumer must ultimately repay. Lenders providing this service must exercise caution in giving it, as not everyone will repay the loan within the specified time frame. Customers must comprehend the consequences of failing to repay the debt on time to prevent interest and a loss in credit score.
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