Mumbai-based Arun Dave, 24, now wants to repay his loans instead of going on an international holiday with his friends this summer. In April 2019, he had started working as a marketing executive at a pharmaceutical firm after completing his graduation. This was his first job and earned Rs 20,000 a month. While joining the organisation, he didn’t have any liabilities but now he has an outstanding debt of Rs 40,000. He spent his monthly income on regular outings, dining with friends, discretionary shopping, etc. These spending habits drastically changed his lifestyle and financial discipline. “Since June 2019, by every month-end, my bank account would be empty,” recalls Arun.
Unhealthy spending spree
He heard about “buy-now, pay later” schemes for online shopping, from colleagues. These schemes were available for booking holidays, ordering food using mobile apps, etc. Arun decided to opt for such schemes by opening accounts with multiple fintech lenders and avail benefits of credit. By paying with the help of credit facilities, he assumed that there would be some savings in his bank account. So, he was tempted to use the credit provided by these firms. He spent Rs 10,000 in June 2019. Then, in the subsequent months, he started using these schemes more frequently even for small purchases. He was able to repay only a fraction of the debt amount with his monthly income. So, the debt piled on, with penalty, late fees, interest rate on outstanding amount, etc. By December 2019, his total debt was double that of his monthly income. Says Arun, “I tried to take advantage of the free credit available from fintech firms. But, I got into a vicious debt cycle due to habit of purchasing on credit and pushing the payments to a later date.”
Arun’s situation is not unique. There are numerous first-time borrowers getting into debt traps because of availing easy finance schemes offered by fintech lenders. Aparna Ramachandra, Founder Director of rectifycredit.com warns, “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.”
How the scheme works
A ‘buy-now-pay-later’ scheme is a personal loan given by a fintech firm to consumers. There are fintech lending firms such as ePayLater, LazyPay, Simpl, etc. that allow consumers to pay later while shopping. All the purchases during a billing-cycle get added up, for which you can pay later. A consumer can make small-value transactions using this scheme, ranging from Rs 100 to Rs 5,000. The purchase can even go up to Rs 30,000 based on the profile of the consumer.
This payment option is available on e-commerce websites such as Flipkart, Bigbasket, etc., on food delivery mobile applications, Zomato and Swiggy, and even in trip booking portals such as Goibibo and Cleartrip.
Parijat Garg, a credit scoring 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.”
Fintech firms give huge discounts, cash back offers and loyalty benefits to gain your attention, while you make a payment online. The credit limit varies for consumers based on their past credit histories (if any), monthly income flow, stability at work, profession, etc. For instance, ePayLater provides credit limit of up to Rs 30,000 to retail consumers and up to Rs 2 lakh to self-employed consumers. A customer can sign-up with multiple fintech firms at a time.
Charges applicable when you don’t repay
Fintech firms such as Simpl and LazyPay generate bills twice in a month, i.e., the 16th and last day of the month. The purchases made during the fifteen days of the billing cycle is reflected in the statement. A consumer has to clear the bill within 3-5 days. In case of delayed payments, the fintech firms charge late fees.
For instance, late fee slabs at Simpl start at Rs 11.8 for a bill amount of less than Rs 100 to Rs 118 for a bill amount more than Rs 500 per billing cycle. It also charges a late penalty of up to Rs 250. LazyPay calculates late fees at Rs 10 per day. It is capped at 30 per cent of the total due amount.
Also, there is interest charged on the outstanding amount. For instance, LazyPay charges 26 per cent as the annual percentage rate and is calculated on a per day basis until you repay. ePayLater charges 3 per cent a month (36 per cent annually) on the total due amount.
Observes Ramachandra, “Personal loans from banks are much cheaper compared to buy-now, pay later schemes. Banks charge between 14 and 18 per cent annually to consumers with credit histories.”
Consequences of non-payment
Arun did not pay the amounts due to fintech firms for a period of more than 30 days from the due date of the billing cycle. So, they suspended his account and notified the merchants of the outstanding due amount. This action restricted his purchases using buy-now, pay later schemes further. They also engaged debt collectors to recover the amount due from him.
The non-payment of amounts due was also reported to credit bureaus. This was reflected in the credit report, which lowered the credit score and prospects for loans from banks. Garg says, “Until he settles the outstanding amount, it will be difficult to access credit from formal financial institutions; even if he manages to get a loan, the rate of interest will be high.”
You should be careful while using such credit facilities. You have to be ready with the money before the repayment due date, once the bill is generated.
If you don’t repay, it will impact your credit history and 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.