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BNPL—or buy now, pay later—is a credit instrument that is becoming popular fast. A BNPL is a no- or low-interest loan facility for small transactions. The BNPL provider settles your bill on your behalf, and you repay the provider within an interest-free window to avoid additional charges. As we head into the festive season, we may hear the term more and more. So, let’s understand BNPL better and see how it compares with a credit card or a personal loan.

“A BNPL works somewhat like a tab at the local grocer; at the end of the month, you need to clear your dues in one shot if you want services to continue," says Adhil Shetty, chief executive officer, BankBazaar.com.

Availing a BNPL: To sign up for a BNPL, you need to visit the website or app of your preferred BNPL provider, fill out a form, and complete your know your customer (KYC) process. Based on your eligibility, you will be provided with the credit line that you can use to shop with the merchants that have partnered with the provider.

Shetty said, “The use cases for BNPL loans are limited, though this is expected to change dramatically as this lending segment grows exponentially. It’s often easy to avail of BNPL because the eligibility norms are relaxed compared with other credit products. There is also no joining or renewal fees."

Cost of borrowing: In most cases, the BNPL does not attract interest. The loan provider collects from the merchant with whom you shop.

However, you need to repay your dues in the interest-free window, failing which the lender will apply a late payment fee. Since this is micro-credit, you borrow small amounts, typically from a few thousand rupees going up to 1 lakh in some cases. “Your repayment behaviour will impact what you get to borrow. Responsible borrowers get enhanced spending limits," Shetty said.

BNPL vs credit card: A BNPL can be used only with a partner merchant, offline or online. A credit card can be used with any business that accepts it as a payment mode, offline or online, plus the user gets an interest-free period. You could make cash withdrawals from your card, which is not a BNPL feature. Your credit card limit may also be much higher in comparison. Card dues attract interest. On premium cards, you also pay joining and renewal fees. If you do not have a stable pay or a sturdy credit score, you will have difficulties in using, or availing of credit cards.

BNPL vs personal loans: Eligible borrowers of personal loans may avail up to 20-40 lakh, which the borrower can utilize any way they want. Tenures of these loans are usually one to five years.

BNPLs, on the other hand, are not only small loans but are typically expected to be repaid in days or weeks.

Any loan, however small, needs to be repaid on time.

Shetty said, “While most BNPLs do not normally entail hard credit inquiries, late payments will register in your credit history, bringing down your credit score. Therefore, always repay your dues on time, no matter how small."

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