Personal Finance

Buy Now Pay Later: A Credit Blessing Or A Debt Trouble?

As the trend of online shopping continues to rise incessantly, more and more customers are looking for easy and flexible payment options. Due to this, there has been a meteoric rise in BNPL popularity over the last few years, bringing about a disruption in the financial sector of the country.

Big e-commerce companies like Amazon and Flipkart, major financial institutions, and leading fintech players such as Paytm, Freecharge, Mobikwik, etc. have also launched their BNPL services lately.

Buy Now Pay Later - BNPL

Though personal loans and credit cards have been available in the market for long, easy availability, convenience, and flexibility are the key differentiating factors that make BNPL more appealing to customers, especially millennials and GenZ.

But like every other financial borrowing option, it is equally essential to use BNPL wisely and cautiously. Directly or indirectly, it is promoting consumer debt and increasing the reliance of millennials and GenZ on extra credit for lifestyle up-gradation and instant gratification.

Table of Contents

What is Buy Now Pay Later?

Buy Now Pay Later is a type of credit line that enables you to purchase whatever you want/need on the current date and pay for it later as a lump sum or in instalments. It provides interest-free credit with no hidden fees/charges and is easier to get sometimes even with no credit history.

However, it is important to note that, like with any other loan, your credit behaviour is recorded & reported for BNPL as well. Any default in repayment of BNPL dues adversely affects your credit score and attracts penal charges.

How BNPL works?

To avail BNPL services, you are required to complete KYC formalities and provide a few details to the offering company. Once you’ve been approved and allotted a credit limit, you can then use this BNPL credit to shop online/offline, pay bills, order food, and more.

All that you need to do is select the BNPL option on the checkout page to complete the transaction. A consolidated bill for all your spending is generated once a month which you need to pay by the set due date. The average interest-free period offered by most lenders varies between 30 and 45 days.

Benefits of BNPL

BNPL came out as a blessing in disguise for millennials and GenZ during the pandemic. When there came a wave of lay-offs, many were struggling to get credit due to a lack of formal credit history. With BNPL by their side, millennials and GenZ can build their credit score and prepare for big-ticket borrowing options if the need arises in the future.

On the other hand, e-commerce and retail companies have gained huge traction due to BNPL. Improved customer retention, better conversions, and refined user experience are some of the benefits these companies have been able to extract via BNPL.

Financial institutions and fintech companies have been able to attract more customers from across all age groups through BNPL.  And this has provided even the new fintech companies with an opportunity to build a strong, loyal, and diverse customer base.

The Downside of BNPL

While BNPL seems like an astonishing option on its face but the fact is that it’s promoting consumer debt and boosting the purchasing power of millennials and GenZ at the expense of their future income. The ‘pay later’ trigger is too tempting which often leads to impulsive spending, and sometimes overspending.

Also, a lesser-known fact about BNPL is that most lenders levy high penalty charges if the dues are not cleared on time. In addition, most BNPL lenders don’t offer any flexibility with the payment date. Thus, increasing the risk of default and late payment.

Long Story Short

Whether you think of BNPL as a blessing or otherwise, the key takeaway from the above facts is to have financial discipline. Smart budgeting, efficient spending, and better planning should be the focus while utilizing any extra line of credit, be it a loan, credit card, or BNPL.

On the regulatory front, the impeccable growth in the BNPL sector has caught the attention of regulators and we might soon see some effective regulations in place for its future success.

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About the author

Vidya Menon

Vidya is an online content developer for Justwebworld. She has a BA in English Language and Literature and an MA in Current Linguistics. She is a passionate reader, writer and researcher with a background in academic writing.