Getting loans was never easier. Everywhere you go, there are various forms of loans available for any kind of purchase. If these, buy now pay later (BNPL) schemes are getting more and more popular. And why not? They offer interest-free loans which can be paid back in equal installments over 6-12 months.
BNPL makes it easier for consumers to make purchases by deferring payments to the future. BNPL is also gaining traction because there is no high interest to be paid and credit scores are not so important to access the scheme.
Retailers are happy with increasing sales, financial institutions are happy giving loans and for the customer, BNPL is consumer friendly as they do not need to worry about negotiating interest rates.
But there are many hidden risks which borrowers need to think about.
These loans encourage bad spending habits and may tempt people to splurge or spend more than they can afford. Buying a TV costing Rs 1,00,000 under BNPL and paying Rs 25,000 per month feels like a steal!
Surveys overseas have found half of BNPL shoppers increased their spending 10-40 per cent and a majority spent on buying items that they may not otherwise have purchased. BNPL can also make consumers take on a lot more debt even for small purchases and this often becomes a vicious cycle leading to a debt trap.
BNPL are unsecured loans and having many such loans will have an effect on credit scores. With many loans, it also becomes difficult to track payment timelines and default in payments will lead to lower credit score. Not to mention all the pesky collection calls that would start.
Default in payment also means late fees and penalties. Many times, the BNPL scheme is for a short period and the borrower may want to extend the scheme futhur. On this, the interest cost is 12-28 per cent p.a. The longer the tenure, the higher the interest charged. Add to that the processing charges of 2-4 per cent, the total cost works out to much more than 20- 30 per cent p.a.
The problem with easy loans is that one gets sucked into taking them again and again. The young are using BNPL as a means to instant gratification. Covid has only made this feeling of you only live once and enjoy life to its fullest even if it means being on loans. Ultimately, easy loans get people into never developing good credit habits.
The next time you think of buying something under BNPL, ask yourself, if you really need that product. As in every other aspect of life, the right balance is important. Even if you are availing BNPL, ensure to pay back in the stipulated time and do not make it a habit to buy all the time on BNPL. Better to have less than be saddled with loans.
There are somethings in life, which are not worth risking, no matter the gains.
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