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How BNPL works, whom it suits, risk factors, watchouts – Explained

BNPL’s impact on the users’ credit profile is similar to any other loan product and borrowers need to use BNPL judiciously and make repayments on time.

Defaulting on the payment for BNPL can spoil their credit score and make it difficult for them to apply for bigger ticket loans.

Buy Now Pay Later (BNPL) is the new kid-on-the-block, when it comes to the financing options for the borrowers. Besides personal loan and credit cards, now borrowers are getting an alternative option to meet their short-term financial requirement. Available largely with the Fintech companies and some leading banks, BNPL may come handy for borrowers looking for credit at low cost and greater flexibility.

In an email interview with FE Online, Upasana Taku, Co-founder & COO MobiKwik, breaks it down on the working of BNPL, how it differs from credit cards, its key features, risks and watchouts to make the best out of the new financing product.

How is the concept of BNPL positioned against credit card usage?

With an under penetrated market and user base of 30-35 million unique-credit-cards, Indian consumers have a huge gap for access to credit. A very large part of the population is underserved or not served by the credit card market. This is where BNPL comes handy, especially for users with poor credit score or no credit history. BNPL enables credit to millions of consumers such as low-income groups, self-employed individuals or young workers who are otherwise underserved by credit card companies, Banks or NBFCs.

According to an industry report, BNPL industry is estimated to reach US $ 45-50 billion by 2026, with approximately 80-100 million users surpassing the unique credit card user base. BNPL annual disbursals are also expected to grow from approximately 3% of India’s total credit card spends in Fiscal 2021 to approximately 15%-20% by Fiscal of 2026.

Whom does it suit to opt for Buy Now Pay Later (BNPL)?

Buy Now Pay Later (BNPL) caters to the unfulfilled requirements of a major chunk of Indian society for credit as it offers the convenience of digital payments and advantage of BNPL.

BNPL has several advantages over credit cards, on account of being digital, resulting in low cost of operations, as well as, having the ability to offer smaller ticket size credit, making it a more scalable and profitable alternative over the traditional credit delivery models. BNPL can also be used for daily life use such as groceries, bill payments, electronic purchases, and other essentials etc.

How does the Buy Now Pay Later (BNPL) credit facility work?

BNPL is an interest free and a low-cost option and can be activated on the provider’s platform. There are usually two types of BNPL products 1) Small ticket credit with an interest free period and 2) For bigger purchases like electronics, consumer durables etc with EMI options.

How is the maximum eligibility for BNPL arrived at? On what factors does it depend?

Service providers may employ AI and ML based analytics to understand customer profile and get better insights into their buying behaviour to determine their spending limits and assign a credit limit accordingly.

Is the usage of BNPL reported to credit bureaus?

Leveraging the BNPL facility helps users to build their credit history. It is ideal for people with no credit history or a low credit score. In case of any delay in making a payment for the credit limit used, the user’s credit score can be adversely impacted.

How does BNPL impact the credit score/profile of users?

BNPL’s impact on the users’ credit profile is similar to any other loan product. Borrowers are urged to use BNPL judiciously and make repayments on time. BNPL can be a great kick-off point for new-to-credit customers to build their credit history and make them eligible for higher ticket loans or aspiration buys.

What risks should users be aware of while opting for BNPL?

While customers usually get to enjoy a minimum interest-free period, they need to repay the amount within this window. If they fail to repay, there could be late fees applicable. Defaulting on the payment can also spoil their credit score and make it difficult for them to apply for bigger ticket loans.

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