Buy Now, Pay Later (BNPL) is not something very new to our economy. We have been practicing it for generations while buying rations for our households. BNPL just adds a fresh twist to this already existing concept in India. So, first, we need to understand what BNPL means and how it can be used, to compare it with credit cards. BNPL is a type of short-term financing which allows customers to break up specific purchases into predictable installments. BNPL plans generally charge no interest or fees, except for penalties on late or missed payments. Each BNPL plan provided to a customer is specifically customized for him but may have a few things in common as well. BNPL is emerging as the fastest-growing e-commerce online payment, as it allows borrowers to keep buying with an option to pay at later date. BNPL in simple words can be understood as a Point of Sale (POS) installment loan that allows customers to make purchases online or in stores and pay for them in several future installments, which is generally interest-free. Currently, BNPL is offered by a few companies such as PayPal, AfterPay, Simpl (in India), Affirm among others.
How does BNPL Work?
All Buy Now, Pay Later are not like each other. Each company that provides BNPL may have its own different set of terms and conditions. But normally BNPL operates in the following manner:
- Customers may purchase at a participating retailer and opt for BNPL as a mode of payment.
- If approved, the customer needs to make a down payment (such as 20% of the purchase amount).
- The customer then can pay the remaining amount in a series of interest-free installments.
Factors to consider while using Buy Now Pay Later
It is important for the customer to understand the repayment terms before entering a BNPL agreement, as it may differ for every BNPL provider. Customers should also pay special attention to the following points before committing to a BNPL plan:
- Initial Deposit Requirements
- Participating Retailers
- Number of required installments in which the purchase amount will be distributed
- Late payment fees or charges
- Refund or return policies
- Credit check requirements
- Limitations on purchases if any
Customers also must consider how the BNPL agreement might affect their credit. Customers should also keep in mind that though they might be approved for interest-free credit for purchases, that’s not a guarantee as BNPL platforms may charge interest or fees on certain purchases that can easily outpace what might be charged with a credit card.
How Credit Cards differs from By Now Pay Later?
Credit Card is another convenient financing tool used widely in the retail industry. Credit Card works on the principle of revolving credit, where we must set credit limit against which we can borrow money. When we purchase something using our credit card, our balance credit amount is reduced by that extent and the credit is freed up when we make periodic payments of our credit card bills. Just like BNPL, credit cards can be used at retailers. But in addition, credit cards can also be used for paying other kinds of expenses such as utility bill payments. Generally, credit cardholders need to pay their balance on monthly basis. Otherwise, their unpaid balance shall accrue interest at the annual percentage rate (APR). Credit cards also include other fees such as an annual maintenance fee, cash advance fees, balance transfer fees, and the like.
By Now Pay Later Vs. Credit Card: Which is better?
Credit Cards are known to offer various incentives to their customers. When we make payments through our credit cards, we can expect to earn cash backs, points, or other benefits. If someone has a good credit score, they can easily find a card that gives at least 1-2% back on every purchase, which adds up to become big savings. Being somewhat traditional, credit cards also offer other benefits such as purchase protection and insurance. As BNPL is still an emerging mode it does not offer benefits or protections provided by credit cards. BNPL also does not offer credit-reporting benefits offered by credit cards.
BNPL may not provide conventional incentives provided by credit cards, but it is a more convenient form of financing for users. It offers a user-friendly interface, which offers an immediate approval process. Customers also find BNPL easier for budgeting purposes as they can monitor payment requirements on an individual item basis, as opposed to credit cards where the cost of all expenses are added up together. BNPL also acts as a useful tool for those who had trouble getting approved for a standard credit card due to insufficient credit history or poor credit score. BNPL may not provide customers with a level of protection offered by credit cards, but it safeguards the interests of customers in its own way. As customers are not required to enter his or her bank or card details on every e-commerce portal with BNPL, they are not prone to phishing or online fraud.
Final Verdict: Buy Now Pay Later vs Credit Cards
BNPL plan makes it easier to buy items online or in stores and pay for them at a later date. But like credit cards, BNPL loans are also required to be paid on time, to avoid late payment charges or potential damage to credit score. Even if someone uses a BNPL plan, it is still advisable to have at least one credit card for situations where BNPL is not applicable. There is also a trade-off between incentives and convenience while selecting between credit cards and BNPL. Users should thoroughly analyze all aspects of both methods before concluding. Additionally, any kind of credit is good only until users can honor their commitments.