Home/ Money / Personal Finance/  How term loans from BNPL firms now work

Last week, Slice, a Buy Now Pay Later (BNPL) player, introduced ‘real time’ term loans to replace its previous offering of a credit line. This change is a result of the banking regulator barring fintech players from offering revolving credit lines on prepaid cards and wallets.

Earlier, customers would be assigned a credit line at the time of registering with the platform and so could draw from the pre-approved credit line to make payments. Now, customers will sign up for a fresh loan (called a term loan) instantly every time they make a payment. For instance, if you choose Slice during payment checkout at an online food delivery platform for a transaction of 600, you will get to borrow 600 from an NBFC partner of Slice. After the NBFC partner approves the request, it will transfer the amount to the Slice card (issued in partnership with SBM bank). 

Axio, formerly CapitalFloat, also follows a similar lending method wherein it issues a loan to the consumer each time she makes a payment to any of Axio's merchant partners.

A credit line is classified as a loan in the books of account. So, when a consumer is assigned a credit line, it appears as an active loan in her credit bureau irrespective of whether the consumer uses it or not.

Under the term loan lending model, only the amount that the consumer actually borrows will appear in their credit bureau. In this regard, term-loan lending model is a step-up from the earlier credit line product. The repayment structure will remain the same wherein customers will get a predetermined interest free window to pay back the full amount, after which interest will kick-in. Using this feature regularly for payments could spell trouble for your credit score as lenders may see you as a risky borrower.

Adhil Shetty, CEO, BankBazaar.com explained, “Any loan you take from a regulated bank or an NBFC will have an associated credit check. This is for the lender to understand your financial habits and stability. Records of all open credit as well as those closed in the last 3-5 years will be detailed in the credit report, and this is one of the primary checks any lender undertakes before approving a loan. Every hard query on your credit score brings down your score by a few points."

Slice, in a communication to customers, said this change doesn’t negatively impact their credit score.

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Updated: 25 Jul 2022, 06:07 AM IST
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