As if credit cards and equal equated installments weren’t enough, Indian consumers are spoilt for choice when it comes to putting off paying for their purchases.
In the past two-three years or so, many fintech firms have come up that allow you to ‘Buy-Now-Pay-Later’ (BNPL). The onset of the COVID-19 pandemic in 2020 nudged many consumers to switch to BNPL schemes.
According to ZestMoney, an Indian EMI financing and pay later company, nearly 68 percent of its users are from tier-2 and tier-3 towns; remaining 32 percent from tier-1 cities.
Pune-based Shalini Rao, 27, is no different. Due to COVID-19 and like many others, she shifted to buying things online, especially her essentials and medicines. But buying online also hooked her on to BNPL schemes. Rao says, “It provided me a convenient and faster form of financing for small and big-ticket purchases around festive seasons and converted them to EMIs later.” But Rao paid a heavy price, later.
'Buy Now, Pay Later' getting popular with millennial
According to a report by ZestMoney that outlines how Indian consumers opted for BNPL solutions in 2020. The average age of consumers who opt for BNPL is 34 years. As per its 2020 report, consumers who availed this facility, typically spend on online education, purchasing of high-end smart phones, electronic appliances, fashion and on travel.
Lizzie Chapman, CEO and Co-Founder of ZestMoney says: “Many people adapted to BNPL in 2020. It is poised to grow this year as the consumer habit is here to stay. Consumers love the all-digital experience for credit.”
Yogesh Verma, Business Head at Mswipe, independent mobile point of sale (POS) merchant acquirer and network provider points out that people in metro cities like Mumbai, Bengaluru and Delhi have seen a high adaption to BNPL way of making purchases, with an average transaction size of Rs 43,000.
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“A pent-up demand coupled with income uncertainty has pushed shoppers towards credit,” says Kush Mehra, Chief Business Officer of Pine Labs, a platform empowering businesses to accept multiple modes of payments.
How does BNPL work?
To put it simply, the buy-now-pay-later scheme allows you to buy something now and then stagger your payments.
A most basic form of BNPL is when you run a book with a fintech firm. Once you enroll with the firm, it allows you to buy products from any of its partner merchants (online stores) within a certain time period, say 15-30 days and then allows you to settle all your bills at the end of the cycle.
If you delay your payments beyond this cycle, then it levies an interest cost, depending on your bill amount. Some BNPL firms also allow you to convert your high-cost purchases into no-cost credit for three to six months. This means, you have got to square up your bills in this time.
Some of the fintech firms in this segment are Amazon Pay, ePayLater, Kissht, LazyPay, Simpl, Slice, ZestMoney, etc.
You can sign up with multiple fintech firms at a time. And you get awarded with a credit limit (say, Rs 100 to Rs 50,000), depending on your credit profile. The BNPL is also an option that’s available with e-commerce websites like Flipkart, Amazon, BigBasket, and so on, and also on food delivery mobile applications like Zomato and Swiggy, and even in trip booking portals such as Goibibo and Cleartrip.
Parijat Garg, a digital lending consultant says, “These fintech firms are creating a sort of virtual facility similar to credit card transaction and payment processes. They are targeting millennials who don’t have a credit card.”
Also read | One-year of COVID-19: Five steps to get out of that debt trap
How much does BNPL cost?
BNPL works as an alternative to your credit cards. For instance, if you make purchases from within the Simpl app (through its 2,500 plus merchants), your bill gets generated every 15 days. If you fail to clear your bill by the due date, a late penalty of up to Rs 250 plus GST is levied.
Kissht charges 21 percent annual interest, if at the time of making a purchase, you convert it into an EMI of more than six months. LazyPay also allows you to stack up your payments to up to 15 days and then you can settle your bills. At settlement date, you can either pay your bills in full or convert them into EMIs at 15 -32 percent interest per annum. This is calculated on a per day basis until you repay.
ePayLater, another fintech firm that offers a BNPL facility, charges a default interest of 36 percent per annum on the outstanding total bill amount.
The trouble in charges piling up
These charges might appear small, but experts like Aparna Ramachandra, Founder Director of rectifycredit.com says that if unchecked, they can balloon into something big and unmanageable.
For instance, when Rao defaulted on her bills, it affected her credit score as well. Unable to repay her equated EMIs over time on account of the job loss during COVID-19 times, she could not repay monthly installments on due date and ended up with a debt of Rs 60,000. “The personal loans from banks are much cheaper compared to buy-now, pay later schemes,” says Ramachandra. There are top banks charging between 8.9 and 10.05 percent interest annually to consumers with good credit history on a personal loan of Rs 5 lakh with five-year tenure.
A bad score reduces your chances of getting loans in future. Garg says, “Until she settles the outstanding amount, it will be difficult to access credit from formal financial institutions; even if she manages to get a loan, the rate of interest will be high.”
Ramachandra adds: “Consumers must know before borrowing that all these fintech lenders are providing personal loans by packaging them in different ways which are expensive and unsecured.”
You should be careful while using such credit facilities. It’s a debt trap with a single bullet payment when bill is generated after 15-30 days or converting the purchase into EMI based payment option. You have to be ready with the money before the repayment due date, once the bill is generated or the instalment is due.
If you don’t repay, it will impact your credit history
, you will have to pay late/default charges and incur interest cost. It will also affect the prospects of getting any credit in the future. You must learn to manage your finances within your monthly income instead of depending on such easy credit schemes.