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Buy Now, Pay Later : All You Should Know

Vijay Kumar

Senior Specialist - Marketing @ Shiprocket

March 15, 2024

10 min read

Have you ever come across that ‘buy now, pay later’ option while shopping online? With the option to split payments into manageable instalments, it eases the burden of big purchases. You can often get instant approval at checkout, similar to a small loan tailored to each transaction. It is becoming a popular payment method, especially online. 

Buy now, pay later has emerged as one of the most popular payment methods. It was the fastest-growing payment method in 2020 in India and the UK, and analysts estimate that these services will account for 12% of total global eCommerce spend on physical goods by 2025. This trend extends beyond online retailers as traditional stores adopt BNPL services. Understanding how BNPL works can help you make smarter choices when managing your purchases. 

So here’s everything you need to know about the Buy Now Pay Later (BNPL) scheme.

The Concept of Buy Now, Pay Later

Buy now, pay later, or BNPL is a convenient way to buy things without paying the total amount upfront. With BNPL, you can split your payment into smaller chunks and pay over time. It’s like spreading the cost of your purchase into manageable pieces. You make a small down payment, such as 25% of the total purchase price. The remaining balance is paid off over interest-free instalments, often weeks or months. The main benefit of using Buy Now, Pay Later is that you don’t have to pay any extra fees or interest on these payments.

You can use BNPL both online and in stores. You’ll often see the option to pay with BNPL at checkout when shopping online. If you’re in a store, some providers offer virtual cards you can use at the register. While BNPL can be a helpful way to manage your finances, some plans may come with fees or interest. It’s essential to understand the terms before you decide to use BNPL for your purchase.

Buy Now, Pay Later: Trends and Patterns

Buy Now, Pay Later (BNPL) has become a significant payment option since the early 2010s. The size of the worldwide purchase now pay later market was assessed at USD 256.54 billion in 2022, and it is projected to grow at a CAGR of 30.5% during the forecast period (2023–2031) to reach an anticipated value of USD 3892.19 billion by 2031

In India, BNPL adoption has been notable, with a projected annual growth rate of approximately 20.5%. This upward trend is expected to continue over the medium to long term, with a forecasted Compound Annual Growth Rate (CAGR) of 12.2% between 2023 and 2028. By 2028, the Gross Merchandise Value (GMV) of BNPL transactions in India is anticipated to surge to $26.1 billion, indicating significant market expansion.

A new trend within the BNPL industry is its increasing utilisation in the travel sector. SanKash, a firm specialising in travel-related BNPL services, experienced a significant increase in travel loan amounts, particularly evident in the second quarter of FY23 compared to the preceding quarter. This surge has primarily been driven by consumers aged 20 to 30, indicating a demographic preference for BNPL in online purchases and travel expenses. 

BNPL services have extended beyond online transactions, witnessing a surge in offline payments. Pine Labs, a leading fintech firm in India, observed a substantial increase in the usage of BNPL services for offline purchases. Their projections indicated remarkable growth, with BNPL transactions expected to reach INR 50 billion monthly, doubling the average monthly transactions.

Despite a few drawbacks, the demand for BNPL persists, fueled by economic factors such as rising inflation and the cost of living. As consumers seek flexible payment options to manage their expenditures, BNPL is poised to continue its growth trajectory in India, offering convenience and financial flexibility to a widening consumer base.

Understanding the Impact of Buy Now, Pay Later on Your Credit Score

Understanding the impact of Buy Now, Pay Later (BNPL) on your credit score is crucial for managing your finances wisely. BNPL can have both positive and negative effects depending on how you use it. Having a BNPL option available doesn’t directly harm your credit score. Your credit score is affected by how responsibly you handle repayments across all your credit accounts, including BNPL.

When applying for BNPL, some providers may only perform a soft credit check or none, meaning it won’t impact your credit score. However, reviewing the terms carefully is crucial as this can vary. Some BNPL services don’t report to credit agencies. However, when they do, it can help those with limited credit history establish credit.

BNPL can benefit newcomers to credit by considering alternative data besides traditional credit reports, making financial services more accessible. Building a strong credit history is possible by making timely payments and managing credit wisely. However, failing to make timely payments will negatively affect your credit score.

BNPL can be a valuable tool if managed responsibly, aiding in building credit or making purchases. Caution is essential to avoid damaging your credit score or facing financial difficulties.

Risks Associated with BNPL Apps

When considering using Buy Now Pay Later (BNPL) apps, it’s crucial to be aware of the risks involved.

  • Understanding repayment terms is crucial with BNPL apps as they’re more tightly regulated than credit cards. Terms can vary widely, from biweekly monthly payments to several months to settle the balance.
  • Overextending financially or misunderstanding repayment obligations is a risk, especially if you have limited or no credit history.
  • A lack of standardised disclosure language can obscure important details, harming consumers or violating rules against unfair practices.
  • Disputes over returned merchandise can be challenging to resolve within the short loan term.
  • BNPL lending relies heavily on automated processes and third-party relationships, increasing operational and compliance risks.
  • There’s a risk of fraud, especially with the first payment, and additional fees like overdraft or late fees if you overextend yourself.

Benefits and Drawbacks of Buy Now, Pay Later

Here are a few benefits Buy Now, Pay Later (BNPL) can offer:

  1. Flexible Payments: BNPL allows splitting payments for expensive items over several instalments, eliminating the need to pay upfront and making purchases more attainable.
  1. Easy Qualification: BNPL doesn’t require a hard credit check, making it accessible to those with limited credit history or newcomers.
  1. Convenient Shopping: For online shoppers, BNPL offers immediate gratification with simple payment terms, allowing hassle-free purchases without delays.
  1. Cash Flow Management: Spreading payments over time with BNPL helps manage cash flow effectively, enabling purchases without straining the budget.
  1. No Interest: BNPL typically doesn’t charge interest on instalment payments, offering a more cost-effective financing option than traditional credit cards.
  1. No Late Fees (in some cases): While some BNPL lenders may charge late fees, others do not, providing flexibility in managing payments without unexpected fees.
  1. Simple Repayment Structure: BNPL loans are paid in four instalments over a few weeks, with no revolving credit line like credit cards. Autopay options simplify payment management.
  1. Quick Approval: BNPL loans can be approved in seconds for online purchases, allowing convenient financing without delays.

Now let’s explore a few cons of Buy Now, Pay Later:

  1. Unsustainable Debt: BNPL services may accumulate more debt than manageable due to easy access to loans, potentially causing long-term financial stress.
  1. Credit Score Damage: Late or missed payments on BNPL loans can harm your credit score, making future borrowing more challenging and expensive.
  1. Fees: BNPL services often come with various services and late fees, increasing the overall cost of purchases.
  1. Hidden Interest: Financing BNPL loans with credit cards may result in unexpected interest charges if not paid off entirely, contradicting the initial interest-free offer.
  1. Data Privacy Concerns: BNPL lenders collect detailed purchasing data, raising privacy concerns and potentially leading to intrusive targeted marketing.
  1. Limited Consumer Protections: Regulations for BNPL products are less comprehensive than those for credit cards, offering fewer protections in case of disputes or purchase issues.
  1. Encouragement of Overspending: Spreading payments over time may create a false sense of affordability, encouraging overspending and financial mismanagement.
  1. Possible Overdrafts: Automatic BNPL payments could increase the risk of overdrawing bank accounts if finances are not carefully managed.
  1. Easy to Overextend Finances: BNPL services may obscure the total cost of purchases, leading to overextending finances and difficulties managing multiple payments.

Guiding the Next Generation: Educating Teens on BNPL

The option of ‘buy now, pay later’ (BNPL) may be familiar to youngsters who are learning about internet purchasing. Understanding how this operates and the possible repercussions is crucial. BNPL normally needs an age requirement of 18 years or above. Even then, acceptance is not guaranteed; a good credit history and score are frequently required. As a result, you cannot use BNPL on your own if you are younger than 18.

BNPL could offer an opportunity to gain experience with monthly bill management. Let’s imagine you wish to buy a jacket with BNPL. One possible solution would be to come to an arrangement to repay a specific sum every month until the loan is entirely settled. But keep in mind that there is an obligation involved; neglecting to repay might have negative effects.

It’s important to know how BNPL will affect your credit if you qualify for it. Spend some time studying debt management. It is essential for your future financial journey that you understand credit and its consequences.

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Conclusion

Purchases made using the ‘Buy Now, Pay Later’ (BNPL) option can be easy and you don’t need to pay the whole amount beforehand. It is a popular choice since BNPL approval is generally easier than obtaining a credit card or personal loan.

However, it is critical to exercise caution when utilising BNPL. While it might help you purchase necessities when you need them, if you’re not careful, it’s possible to accumulate more debt than you can manage. This might hurt your credit score. Be honest about whether you can afford the payments and what consequences you might face if you can’t pay on time. By being informed and responsible, you can make the most of BNPL without risking your financial well-being.

Is KYC necessary for BNPL?

BNPL is a no-cost financing plan offering a flexible and simple payback schedule and a fast online KYC check and verification process.

Is BNPL unsecured or secured?

Regarding BNPL financing, borrowers are not required to pledge any collateral, such as their house or car, to obtain the service.

What other name does BNPL go by?

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