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How does buy now, pay later work and how is it different from a credit card

by janeausten
How does buy now, pay later work and how is it different from a credit card

Buy now, pay later is a convenient option to get access to credit for those who are tight on liquidity and don’t possess a traditional credit card. It’s a short-term financing facility offered by various merchants and financial companies making it easy for young consumers with limited finance to plan their consumption wisely.

How do I buy now, pay later for work?

You only need to make a small down payment for the total amount spent. The interest-free period usually is between 15 to 45 days. The company providing the buy now, pay later facility settles the partner merchant’s bill on behalf of the buyer immediately. Failure in repayment of the due amount to the BNPL provider results in interest being charged on the outstanding amount. The credit limit usually ranges from Rs. 500 to Rs. 30,000.

How is BNPL different from a credit card?

Buy now, pay later is pretty similar to a credit card in the sense that both provide the facility to take credit instantly and pay later within a stipulated amount of time. 

Differences between buy now, pay later (BNPL) and a credit card – 

  1. Credit cards have a screening process for getting approved to receive the card while BNPL doesn’t
  2. Credit cards can be used at pretty much any business that accepts credit cards while BNPL is accepted only at partner merchant’s transactions
  3. BNPL is a transparent, low-cost credit model while credit cards can sometimes have hidden charges
  4. Credit card spending limits can be much higher than BNPL
  5. Credit cards can also be used to pay loans while with BNPL you cannot

Key things to note in BNPL, as a buyer –

  1. Pay your dues on time and avoid interest charges – Pretty much like a credit card, you need to pay your outstanding within a stipulated amount of time. The interest-free period usually ranges from 15-45 days post which the BNPL provider will charge interest on your outstanding. So make sure you pay your outstanding within time to avoid interest charges
  2. Impact on your credit score – Nonpayment of dues on time can reflect on your credit report and can hurt your credit score. It will stand as an outstanding debt on your report and hence affect your creditworthiness. It can be a parameter that banks/financial institutions look at when you go out to seek other loans.
  3. It is still a credit and needs to be paid back – Remember BNPL is a type of loan so it still needs to be paid back at a later date. Do not spend more than you can repay within the stipulated time. 

A lot of merchants today are offering the Buy now, pay later facility for a variety of reasons. Selecting the right BNPL provider will depend on a lot of factors. Listed below are some of them –

Key things to note in BNPL, as a seller –

  1. Type of goods/services you sell – Select a provider that offers BNPL services for your product/service
  2. The average pricing of your product – Look for a BNPL provider that allows customers to avail of the facility for the pricing of your product
  3. Your customer base – Choose a BNPL provider that caters to the customer base of your product
  4. Geographical areas where you need the facility – If you sell globally, you need a BNPL provider that can offer services beyond location boundaries
  5. Credit limits offered – What are the credit limits offered? Do they suit your customer base and business type?

Let’s look at how it benefits them and what are the factors they should be careful about –

Benefits of BNPL for sellers –

  1. Upfront payments and no risk of fraud – Since the BNPL provider pays to the merchant immediately, the merchant gets their payment upfront and there is no risk of fraud or default on payments had they been given the credit on their own. It is almost equivalent to selling on credit to the customer but without risk.
  2. Widened reach for the merchant – With flexible payment options available via BNPL, more customers would be willing to shop from the merchant than before. It increases the customer base for the merchant because buying has become easy for many people. It is more likely to attract young customers who often do not have enough liquidity to pay in one go. BNPL providers also have their marketing channels where they promote the merchants, they have tie-ups with hence increasing your online and offline presence.
  3. Better customer experience – Offering a variety of payment options is always good for the business. Different customers have different payment options and when you provide that, automatically you become a preferred merchant. BNPL also has a seamless and quick payment process which is usually just a few clicks.
  4. Increase revenue – Customers are a lot more likely to buy products if they can pay for them conveniently over a period of time. Something that a customer cannot afford in a lump-sum payment but in installments is highly enticing and achievable for them and will most likely result in the conversion of a non-customer to a loyal customer. 
  5. Larger purchases by a single customer – The buying capacity of a single buyer goes up when they do not have to pay for the entire amount in one go. Smart shoppers will plan their finances and will know how much money they can afford to spend over a period of time. Hence, they would want to aim for higher purchases given the flexibility of paying over a period of time or in installments.

Conclusion

BNPL has very quickly become a popular way of payment. While it is a very convenient way to pay for your expenses, remember it is ultimately a form of credit. Pay back your dues on time to avoid additional interest payment and hurting your credit score.

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