Before signing up for a BNPL plan, read the fine print carefully and watch for red flags like unclear repayment terms, vague information on interest or late fees, and marketing that downplays the cost of default.
This festive season, India witnessed a sharp uptick in demand for quick credit, with digital lenders reporting up to a 50 per cent rise in festive loan applications.
Interestingly, even higher-quality borrowers are tapping into short-term credit options for convenience and flexibility.
Even as demand gathers pace, borrowers need to ask if 'buy now, pay later' (BNPL) is right for them.
How BNPL works
BNPL is gaining popularity for purchases like mobiles, gadgets, and household items.
It lets customers buy instantly and pay in instalments over a few weeks or months.
"At checkout -- online or offline -- the customer selects BNPL, where a fintech platform (or a partner bank) pays the merchant upfront, and the buyer repays in scheduled instalments, often interest-free initially," says Raoul Kapoor, co-chief executive officer, Andromeda Sales and Distribution.
"Spending limits are set based on the user's creditworthiness, transaction history, and spending behaviour," adds Kapoor.
Pros and cons
BNPL services offer quick, hassle-free small loans for consumer purchases with minimal documentation.
These short-term loans are approved within minutes.
Buyers are able to split payments into small instalments or defer them -- helping manage spending better, especially during festive sales and discounts.
"For disciplined users, it's a handy cash-flow tool to manage big or unexpected expenses.
"It helps younger customers build short-term purchasing power. It offers interest-free repayment windows, simple digital onboarding, and transparent repayment schedules," says Kapoor.
"BNPL thus enhances affordability and prevents the need for costlier borrowing," Kapoor adds.
However, BNPL services should not tempt you into overspending.
"Easy credit and zero-interest offers shouldn't encourage overspending or impulsive purchases," says Adhil Shetty, CEO, BankBazaar.com. Multiple BNPL commitments can strain monthly budgets and savings.
Missing due dates can have serious consequences.
"Delays can trigger hefty interest charges, late payment penalties, and collection fees, quickly converting a seemingly interest-free purchase into a costly one," says Deepak Kumar Jain, founder and CEO, CredManager.in.
According to him, hidden charges such as account reactivation fees, processing charges, and mandatory auto-debit clauses may also add to the borrower's burden.
Impact on credit score
BNPL repayments are reported to credit bureaus.
Timely repayments can improve an individual's credit score, while missed or delayed payments can hurt it.
A BNPL provider's credit-check policy can affect the credit score.
"Some providers run a hard inquiry for every purchase, which may negatively affect your score," adds Shetty.
"Even if a provider doesn't report yet, past defaults may show up later once reporting begins," says Kapoor.
Selecting the right provider
Treat BNPL like any other formal credit product.
Read the terms carefully -- especially repayment tenure, post-grace period interest rates, and late-payment penalties.
Check if the plan is genuinely interest-free or only during a promotional period.
Also, check if processing charges need to be paid.
"Understand the repayment frequency to avoid cash-flow issues," says Kapoor.
Both fintechs and e-commerce platforms offer BNPL.
While the former focus purely on lending, e-commerce players can leverage product margins and cross-selling opportunities to often absorb fees and offer better deals, making their BNPL plans cheaper overall.
"E-commerce platforms usually have an edge in processing costs and effective interest rates," says Santosh Joseph, CEO, Germinate Investor Services.
Red flags to watch out for
Before signing up for a BNPL plan, read the fine print carefully and watch for red flags like unclear repayment terms, vague information on interest or late fees, and marketing that downplays the cost of default.
Late payments can attract 30 to 40 per cent annual interest plus penalties.
"If auto-debit is enabled, maintain sufficient balance to avoid double charges from banks and BNPL providers.
"Also, watch out for unexplained credit rejections," says Abhishek Kumar, a Securities and Exchange Board of India-registered investment adviser and founder, SahajMoney.com.
Even 'interest-free plans' can have hidden costs. "Clarify what 'zero interest' and 'no processing fee' truly mean to avoid surprises later," says Joseph.
Is BNPL right for you?
BNPL suits disciplined borrowers with steady income and short-term cash flow mismatches, who use it for small or essential purchases.
"It should be avoided for discretionary spending or by those with multiple debts, irregular income, or poor repayment habits.
"Students, first-time earners and impulsive shoppers are more prone to misuse it, as easy credit can encourage overspending," says Jain.
Avoid debt trap
To use BNPL wisely, treat every deferred payment as a liability and include it in your monthly budget.
Keep BNPL instalments within 10 to 15 per cent of monthly income.
Set reminders for due dates and track total dues regularly.
"Clear high-interest debts, such as credit cards, first before taking new BNPL commitments.
"Avoid taking loans from multiple BNPL platforms at once. Treat BNPL as short-term credit, not free money, to avoid a debt trap," says Jain.
Limit BNPL use to a maximum of two plans for easier tracking.
"Ensure total BNPL, credit-card, and EMI payments do not exceed 30-40 per cent of monthly income.
"Set up auto-pay only after confirming sufficient balance, and keep a buffer equal to one month's dues to avoid penalties and overdraft charges," adds Kumar.
Key checks to run
Source: BankBazaar.com
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Feature Presentation: Ashish Narsale/Rediff
