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Tata Capital > Blog > Wealth Services > Buy Now, Pay Later (BNPL): Meaning and How It Work

Wealth Services

Buy Now, Pay Later (BNPL): Meaning and How It Work

Buy Now, Pay Later (BNPL): Meaning and How It Work

Gone are the days when there were just a handful of options to pay after an online purchase. With more types of credit transaction systems gaining traction in India, it is unsurprising that the buy now pay later system has followed suit. According to an India Times report, India now has approximately 22-25 million BNPL customers, with a projected increase to 90-100 million by 2026.

However, there are still many who are new to this concert and are sceptical about it. If you are one of them, read this article until the end to know what BNPL payment is and how it works!

What Is Buy Now Pay Later Payment?

Buy Now Pay Later, or BNPL is a form of payment that allows you to purchase without paying the entire cost at the time of purchase. Buy now, pay later (BNPL) loans are a kind of instalment loan.

It splits your purchase into several equal instalments, the first of which is due at checkout. The remaining payments are charged to your debit, credit card, or bank account till you complete the transaction.

How Does the System of Buy Now, Pay Later Work?

The entire system of BNPL works in the following manner-

Step One – Purchasing

As a customer, you begin the BNPL process in the same way you would for any other online purchase. You browse your favourite online stores, choose your items, add them to your cart, and prepare to pay.

Step Two - Checkout page

At the checkout page, the customer is presented with a myriad of payment options like cash on delivery, credit cards, debit cards, etc. Among these options would be the BNPL option. The seller's preferred BNPL provider presents this option.

Step Three - Soft credit check by the BNPL provider:

When a consumer purchases things through BNPL, they provide certain personal information, like their address, etc., to the BNPL provider. Then, the provider instantly performs a soft credit check on the customer. On the basis of their credit history, the provider ensures that they would repay the outstanding amount.

Since this credit check is not reported to credit bureaus, it will not negatively impact the customers' credit scores.

Step Four - Processing of the transaction

After the approval, the seller is charged a fee by the BNPL provider. The BNPL provider also takes a share of the retail transaction. This is billed to the seller directly.

The fee (which usually ranges between 2% and 8%) is deducted from the amount remitted to the merchant by the BNPL provider.

Step Five - Enjoy your interest-free payment

The total amount is paid off gradually by the customer. Most BNPL vendors provide interest-free payments if the consumer pays their entire sum in a short period (usually 30 days).

Customers who wish for extra time to pay off their balance can also benefit from various payment plans. However, these plans have varying interest rates. Hence, as a customer, you should pay the due amount as quickly as possible. This will decrease the total interest that you will pay.

Advantages of Buy Now Pay Later

1. It doesn't require any credit check

A hard check can negatively impact your credit report, which can, in turn, lower your credit score.

With BNPL, this is not a concern. As part of the approval process, certain BNPL apps make a soft draw on your credit (which does not affect your credit score). Additionally, BNPL soft checks are often easier to approve than credit cards.

2. It allows for adjustable payment options

Flexible payment options are the need of the hour, and BNPL services do not disappoint us! Most BNPL services provide clients with several payment options at the moment of purchase.

As a consumer, you can use the BNPL service to either pay the entire purchase amount or split the payment between buy now, pay later, and another payment source (such as a debit card).

3. It's an equaliser for those without credit cards

A BNPL service provides many perks similar to a credit card. But keep in mind that you can use BNPL for smaller purchases. You may utilise a BNPL service like a credit card by asking for a virtual card number from your BNPL service providers before purchasing.

You can use this card number to cover the exact amount of funds needed to make your purchase. Then, you can proceed with the process through your BNPL vendor's website or smartphone app.

Disadvantages of Buy Now Pay Later

1. It can lead to overdrafts

If you are not careful, frequent, automatically scheduled payments may increase the possibility of bank account overdrafts. If BNPL payments are routinely drafted from your checking account, keep track of the payment dates and ensure you have enough cash.

One way to avoid overdrafts is by marking the payment dates in your calendar. Additionally, you must ensure that there is sufficient time between each payment date to deposit the required cash to meet the deadline and avoid overdrafts.

2. It facilitates impulse spending

The most serious concern with BNPL platforms is that they may foster impulse spending. For example, with buy now pay later financing, you can buy anything before putting a dime down. That can seem enticing, but you have to wonder how countless individuals buy goods they later find they don't actually want or need and sometimes even cannot afford to pay for.

Make sure you don't fall into this trap by being diligent and judicious with your financial choices.

3. Possibility of late fees

If you fail to make a payment or do not have enough cash in your linked bank account, you will most certainly have to pay late fees. Many are fair flat-rate costs comparable to those levied by credit cards, but these fees can accumulate over time. The best way to avoid this spiralling situation is by paying on time and preventing excessive charges.

Wrapping Up

Since most lenders provide this facility and offer repayment at no-cost EMIs, it will likely become a preferred payment option, especially among the youth. Therefore, the future of BNPL looks promising if customers use the facility effectivity and pay the amount on time.

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