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BNPL vs. Credit Cards vs. Personal Loans: Which One Is Right For You?

Credit cards score points for universal acceptance over BNPL, as the latter are still limited to partner merchants, although service providers regularly add hundreds of partners.

Consumers, especially Millennials and Generation Z, are now looking for simplified microcredit solutions to better manage their recurring and occasional purchases that are easy to apply for and seamless to avail. All of these factors have led to the massive popularization of Buy Now Pay Later or BNPL services in India in recent years.

With over 30 focused startups, some e-commerce giants, and even leading banks and NBFCs joining the bandwagon now, BNPL services in India are making rapid strides in customer onboarding, trading partnerships and attracting investment.

According to Bankbazaar, BNPL services have been part of the global digital lending ecosystem for over 15 years. But the pandemic has been a stimulus for its massive popularity in the recent past coupled with the surge in e-commerce, the deepening of mobile internet penetration, and the increasing redundancy of cash transactions, particularly in countries like China, the US, Australia, and India.

What is BNPL?

A BNPL service allows customers to make eligible purchases that can be split into simple installments or paid back at a later date (within the repayment cycle) with zero to low interest fees. BNPL service providers offer short-term microcredit to customers for specific purchases, typically starting from Rs 2,000 and up to Rs 1 lakh in credit limits, with repayment cycles ranging from 14 days to 30 days (up to 90 days, in some cases) depending of the service provider’s terms and conditions.

However, late payments (and in some cases interest fees) could be charged for repayments beyond the due dates, while BNPL providers may report late payments to credit bureaus that could affect the creditworthiness of these users.

The BNPL service providers often use new-age mechanisms to assess the creditworthiness of customers and the entire process of customer onboarding and credit limit sanction is usually completed digitally within minutes with minimal documentation. Some players also offer pre-approved BNPL credit limits to select customers, according to the Bankbazaar study.

BNPLs can currently be enjoyed on a growing number of e-commerce, food ordering, ridesharing, travel booking, online grocery and service websites, and even on edu-tech portals among hundreds of other merchant platforms. Transactions can be carried out seamlessly during checkout in a safe and secure manner with a tap of a finger without the need to enter card details or OTPs.

Some BNPL service providers also offer their customers additional incentives in the form of additional discounts or cashback for the use of their facilities, timely repayments or for certain transactions. These consumer buying instant fund offering platforms generally make money through merchant commissions and late fees, not interest fees.

How does BNPL compare to personal loans and credit cards?

BNPL VS. CREDIT CARDS

Credit cards score points for universal acceptance over BNPL, as the latter are still limited to partner merchants, although service providers regularly add hundreds of partners. Credit cards also offer perks and privileges that help users save more and achieve higher living standards through their transactions. Cards might offer higher spending limits, although they might be more difficult to come by in comparison due to the stricter drawing norms. BNPLs have no annual, processing, or renewal fees like cards sometimes do. The key differentiator, however, is the interest fees, which are typically not charged for BNPL services – users have to pay a non-cumulative late payment fee unlike credit cards, although some cards now also offer interest-free EMIs.

BNPL VS. PERSONAL LOANS

Personal loans are large volume, universal, unsecured funding facilities with credit limits much higher than BNPL services. In contrast to BNPL, however, there are higher fees. Another key differentiator is Revolving Loans – BNPLs offer this, while Personal Loans do not, as they are one-off loans. In addition, a customer’s age, income, credit history, occupation, etc. are checked by the lenders to determine the creditworthiness, although the application process and loan disbursement for pre-approved loans is fast. BNPLs, on the other hand, often use new age mechanisms to determine the creditworthiness of the borrower, which usually only takes a few minutes.

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Credit cards could offer a wider range of benefits, a higher credit limit, and universal acceptance, but with cumulative interest charges for late payments. BNPL services are smaller but simpler credit facilities for consumer purchases at partner retailers that often result in EMIs that do not incur interest charges, but in most cases only incur a one-time fee. They can also be easier to register compared to credit cards that have not been pre-approved. These factors make them very well suited for users looking for short term micro credit facilities, especially those that are not credit card friendly.

Personal loans are intended for large funding needs, often during an emergency cash crunch, and are not recommended for smaller discretionary purchases due to the interest burden associated with them.

BNPLs, credit cards, and personal loans are all different types of credit, but they all require very disciplined use. Users must not become over-indebted and minimize their use to finance lifestyle and consumption. You need to read the fine print carefully, understand fees, and make sure your fees are always paid on time, says Bankbazaar.

Credit cards and personal loans charge interest on late payments. BNPLs impose a penalty. Reckless use and late payments with any of these facilities can jeopardize the user’s creditworthiness and reduce their chances of getting the best deals if they apply for other loans in the future.

As for BNPLs, they are pioneering in providing seamless microcredit solutions to millions of customers. As with any other loan product, however, knowledgeable usage and the highest level of financial discipline are key to maximizing the mortgage lending value.

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Richard Dement

The author Richard Dement