Buy Now Pay Later: Here's how BNPL works, who is eligible and how it impacts your credit score

Buy Now, Pay Later or BNPL is a short-term financing tool offered by fintechs that allow customers to purchase items first and then repay the amount in installments over an agreed period of time. Some companies also offer BNPL on interest-free basis, which makes it more appealing over EMIs and credit cards for some users.

A simple and convenient payment option with usually short repayment tenures BNPL is offered by online merchants or fintech companies regulated by the Reserve Bank of India (RBI) in India.

How does BNPL work?

When you sign up for BNPL with a provider, it is the lender / company that makes the upfront payment for your item while you agree to repay the loaned amount over a predetermined period in installments.

Your repayment plan depends on the terms of agreement for the facility and could be either lump sum or in EMI format. Notably, delay in repayment or inability to repay the debt could result in penalties and drag your credit score.

Notably, interest on BNPL depends on the service provider and other factors such as the repayment structure, amount spent and your credit score. Some companies may also offer a certain period without interest, and following transactions at a predetermined interest rate that may not be applicable if debt is repaid within term.

Who is eligible to apply for BNPL facility?

• Must be a resident of India in a Tier I or II city.
• Must be over 18 years of age, up to 55 years old (depends on the service provider).
• Must be a salaried individual with a bank account and complete KYC documents.

In the Indian market, BNPL players include Amazon Pay Later, Capital Float, EPayLater, Flexmoney, LazyPay, Ola Money Postpaid, Paytm Postpaid, Simpl and ZestMoney. Further, private banks including Axis Bank and Kotak Mahindra also offer BNPL facility for their customers.

How does BNPL affect you credit score?

BNPL can have both a positive and a negative effect on your credit score. It depends on how responsibly one uses it and whether your actions are reported to the credit bureaus.

Credit score is calculated by four prominent credit bureaus regulated by the central bank of India i.e. RBI — TransUnion CIBIL, CRIF High Mark, Equifax and Experian, also known as Credit Information Companies (CICs).

• Some providers may conduct a credit check before accepting your application for BNPL — either soft or hard checks, itself do not impact your credit score, but continuous check due to the repayment schedule may cause your numbers to take a hit.

• Inversely, making timely repayments and this financial behaviour being reported to the credit bureaus could also improve your score. Good financial habits can help build a good credit history along with your credit card, loan repayments, EMIs, etc. On-time payments improve the credit profiles and credit scores of borrowers.
• Missing payments or defaulting can result in significant declines. Missing payments can cause a drop of around 100 points, depending on the severity of the case and the frequency and duration of missing repayments. However, since not all BNPL providers report to the leading credit bureaus, the impact can vary on a case-by-case basis.

How can you manage BNPL responsibly?

• Always create an expense plan for the month to avoid unexpected expenses. Take into consideration the BNPL repayments to ensure no debt or interest builds up. This way, your credit score will remain healthy.

• Don’t use multiple BNPL accounts. Excessive use of credit can reflect negatively on your credit profile and make future personal loans and home loans difficult to secure.
• Consistently review your credit profile, review the terms, fees, and your credit report for transparency and accuracy.

Notably, any form of credit (borrowing or loan) comes with associated risks and it is advisable to take due consideration of all the factors before making the choice.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.