The concept of “Buy Now, Pay Later” (BNPL) has taken the world by storm. The idea is simple – you get to buy what you want immediately and get a little extra time to pay for them.
Think of it as a form of short-term loan that allows you to make purchases without having to shell out money from your own pocket. This facility allows you to pay for the purchases at a later date, most often interest-free.
It is rapidly turning into an increasingly popular mode of payment, especially when people are shopping online. BNPL may seem like a dream finance and a highly convenient option, but is there a catch?
Also known as point-of-sale installment loans, BNPL will turn into a problem only if you don’t pay.
What is Buy Now, Pay Later?
Several companies offer BNPL services. The financing arrangement allows you to buy what you want without paying for the purchases all at once. Even credit card companies have similar installment options.
BNPL offers you instant access to an approved credit limit that you can use to purchase what you need and pay for them in installments or at a future date. The repayment is most often interest-free. Read why Buy Now Pay Later is such a trend here.
It offers a convenient and seamless user experience and people are using BNPL to do everything from shopping online to paying bills with the quick and easy facility.
How does Buy Now, Pay Later work?
BNPL programs operate on the following rules:
- You opt to buy now, pay later during checkout while making a purchase at a participating retailer.
- If you’re approved (happens in seconds), you have to deposit a small down payment, usually 25% of the total amount.
- You pay the balance due amount in a series of interest-free installments.
- You can repay using a check, bank transfer or automatically have it deducted from your debit card, bank account or credit card.
How is BNPL different from credit cards?
When you use a credit card, you only have to make the minimum amount specified as due on the card each month. Interest grows on the remaining amount until you pay it in full. The balance remains indefinite.
With a BNPL arrangement, there are no interest charges or fees usually. There is, however, a fixed repayment schedule – usually spread across several weeks or months. You usually have to pay the same fixed amount each time.
What are the key points to remember while opting for a BNPL scheme?
- Easy, convenient means to pay for purchases over time.
- Zero-interest or lower interest rates than credit cards.
- You don’t usually need a good credit score to qualify.
- Rate of approval is fast.
- Payments can be difficult to track.
- Delayed or missed payments lead to late fees and damage to credit score.
- You don’t get any rewards or cashback on purchases.
- Even if you return the item, you still have to pay.
Why it’s important not to miss payments?
Financial discipline is key when making repayments to BNPL. Quite simply, a missed payment will attract a late fee. It can also impact your credit profile.
BNPL lenders, online retailers and other players may check your credit profile when you sign up or when you use their services. These get recorded on your report and can impact your future credit inquiries.
Late or missed payments may also get you labeled as a defaulter making it difficult for you to get approvals on other loans in the future.
You may incur late payment fees and collection fees if you miss or delay payments. The fees may vary but can often be without limits. You can also face bounce charges or a dishonor fee from your bank if there is insufficient money.
BNPL lenders are usually not covered under the National Consumer Credit Protection Act. This means credit laws don’t apply to them and they do not have the same obligations.
What can you do to not miss BNPL payments?
Pay your BNPL dues on or before the date and be rewarded for being a loyal consumer. Set calendar reminders and schedule alerts to stay updated on when it’s time to pay your dues. Make timely payments before interest starts piling up.
If you’ve automated deductions from the card or bank account, ensure you have the money ready in your account so there is no backlash in the form of late fees or bounce charges.
If a big enough sum of money lands in your lap, either from tax returns or a salary bump, settle the loan, provided you don’t get penalized for early closing of the loan.
End of the day, don’t get carried away. Turn this credit option into an advantage. Make wise decisions with your money.