The shopping pattern among us has changed drastically over the past few years, we started with going to shops and asking the shopkeeper to show us the latest designs and models, relying only on what the shopkeeper thinks is the right buy for us, to looking at our phone/laptop screens and choosing from thousands of options. We started by calculating cash to entering our card details before hitting "pay now".
But now, there's a new genie out of the bottle, notoriously known as 'Buy Now Pay Later' or BNPL. This is a financial scheme that lends credits to purchase things online which can be returned in installments within a short, often interest-free period, without charging any upfront amount from your credit or debit card. To simplify this, let's assume that you really liked a dress worth Rs 2000 but are currently short on funds, or cannot get any extra credit from your credit card. What you do next is, log yourself in a BNPL platform and it gives you a specific spendable amount for the month (or for a specific period set by the particular provider). Now, while choosing the payment option, you choose the BNPL provider and the platform will automatically deduct the amount from your spendable amount. Thus, your bank balance remains the same. If you clear all the dues on time, you won't be charged any additional amount.
On the other hand, when you shop with a credit card, the merchant sends your card details to the bank that has issued you the card, the bank then verifies your information and approves or declines (in case of the expiry of the card, crossing the available credit limit, non-clearance of due amount) the transaction. Once the transaction is approved, your card's available credit is reduced by the amount of the purchase.
So, the question is, how do you choose the right option between them? Well, let us simplify this conundrum a little for you.
Interest Rates and Charges
BNPL often offers interest-free EMIs for specific durations, enabling users to avoid interest if the amount is paid within the given time, from a few days' repayment window to a few weeks. But, if you are unable to pay in due time, you might be charged from 3 per cent each month to a soaring 12 per cent annual penalty on the outstanding amount, depending on the platform. For example, some platforms charge Rs 15 per day as a penalty, while an e-commerce site charges late payment fees ranging from Rs 60 to Rs 600 for due amounts ranging from Rs 100 to Rs 5,000 and above.
Credit cards normally have an interest-free grace period of 20-50 days. Paying the entire bill within this period saves one from interest charges. However, unpaid balances attract interest rates from 2.5 per cent per month to between 24 per cent to 49 per cent per annum, depending on the issuer. For example, most premium credit cards in India charge around 3 per cent per month on unpaid balances, which can quickly add up if dues are not cleared.
Flexibility and Acceptance
BNPL services are mainly linked to specific online and offline merchants. They offer shorter repayment terms, usually several weeks to months, which make them suitable for specific short-term purchases. BNPL is great for those who want installment payments without having to apply for a credit card.
This feature of credit cards is more lenient and widely acceptable, both offline and online. They allow payments of only minimum due with full rollover without interest charges but sometimes at a sky-high rate of interest. Credit cards can also be attractive with rewards or cashback and mileage benefits, mainly for frequent consumers.
Effect on Credit Score
While many BNPL providers do not require a credit check at first, late repayments are reported to credit bureaus, which could harm your credit score. This may impact future approvals for loans or credit cards.
Credit cards increase your credit score, provided that they are used wisely. In such a scenario, a person maintains on-time payments and low utilization. However, this is only negative if he/she misses some payments or even crosses the utilization level.
According to Statista, in 2021, the customer base of BNPL for online and offline retail in India comprised five million and two million, respectively. This is anticipated to jump to 30 million for online retail and 22 million for offline retail by 2026. This sudden hike proves how BNPL services have gained importance as a mode of payment in India.
Which to Choose?
Your BNPL vs credit card choice should be based on your spending behaviour, financial control, and lifestyle needs:
Choose BNPL if:
You like to have interest-free short-term installments for particular purchases.
You do not have a credit card or dislike the complexity of the billing cycle.
You can repay it in time, every time.
Opt for credit cards if:
You require a widely accepted mode of payment and the facility to carry forward the balance.
You’re disciplined in repaying dues to avoid high-interest charges.
You want to enjoy rewards, cashback, and other card-specific perks.
Ultimately, both BNPL and credit cards have their advantages. Assess your financial goals, repayment capacity, and spending style to decide which option aligns better with your needs. Making an informed choice can ensure you benefit from these modern payment methods without falling into debt traps.
