Buy Now, Pay Later v/s Credit Cards: Which is better?

September 27, 2021 Mutual Fund

Although it has been four decades since the time credit cards were launched in India, they have become the most preferred payment method only in the last decade. As our tendency to purchase on an interest-free period has increased over time, more and more companies are coming up with new credit cards and other interest-free credit schemes. In the past few years, many banks, Fintech players, and even e-commerce companies have launched their own Buy Now, Pay Later (BNPL) schemes, which lets the consumers make their purchases on credit and pay on a later date without any interest. As both the options seem pretty similar, it might be difficult for a consumer to choose which one is better.

To find out which one is the better option for you, Buy Now, Pay Later or Credit Cards, let’s first understand how Buy Now, Pay Later scheme works:

• As the name suggests, the BNPL scheme let you buy your products and services when you want them and pay for them at a later date.

• It is a type of short-term financing that offers an interest-free period.

• There are minimum eligibility requirements to avail BNPL facility.

• Only a soft credit score check is performed while sanctioning the credit limit.

• When you prove your creditworthiness over time, your credit limit increases accordingly.

• Under the BNPL scheme, a borrower is usually not charged any interest or processing fee unless the repayment is not made on time.

• Some companies may also offer no/low-cost EMIs under BNPL schemes, which are usually offered for less than six months duration.

• You do not need a physical credit card to avail this scheme as it is a digital credit limit offered by a bank/finance company.

• The features of this facility differ from company to company as each company has its own policies. Therefore, it is necessary to read the features, terms and conditions before availing BNPL facility.

Who offers the Buy Now, Pay Later Scheme?

• Banks:

  Most leading banks have started providing the facility of BNPL to existing as well as new-to-bank customers. Thus, it helps the banks to grow their customer base. However, banks offer this facility only to selected customers with a good credit history and credit score. FlexiPay by HDFC Bank and ICICI PayLater are examples of BNPL schemes offered by banks.

• Fintech Players:

  Buy Now, Pay Later schemes are truly transforming the Fintech companies. These Fintech players tie-up with multiple merchants and offer BNPL facilities when you purchase products or services from those merchants. The application process is quite simple. You need to visit the website or download a mobile application and sign-up using your mobile number and email address. After you have digitally provided your identity and address proof, your application will be processed, and a digital credit limit will be sanctioned for you. Some Fintech players that offer BNPL schemes in India are ZestMoney, LazyPay, Sezzle, etc.

• E-commerce:

  Many e-commerce companies have also started providing the facility of BNPL to their old and loyal customers. You just have to register yourself for the PayLater facility with these merchants, and if you are eligible, you will get a sanctioned limit for BNPL once you upload the required documents on their website. The best examples are Amazon PayLater, Flipkart PayLater, Ola Postpaid, etc.

How is Buy Now, Pay Later facility different from a Credit Card?

The main similarity between BNPL and credit card is an interest-free period for repayment. Let’s see how these two options differ from each other:

1. Interest-Free Period:

While both the options offer an interest-free period, the duration of this period differs slightly. Most credit cards offer an interest-free period of up to 45 days. Whereas for Buy Now, Pay Later, it is usually between 15 to 30 days.

2. Charges:

Annual Fee: Most credit cards come with extra costs, such as joining fee and annual fee, which can be higher for high-end cards. In contrast, there are no joining or annual fees for BNPL schemes. So, you can sign-up for free and keep the credit limit ready to use it whenever you need.

Interest: Credit cards and BNPL will charge you interest if you do not repay the amount within the interest-free period. Credit cards are known for their higher rate of interest. Although the interest rate of BNPL is comparatively lower than that of credit cards, it is still considered high. Both the options charge interest between 20% p.a. to 30% p.a.

Processing Fee: There is no processing fee on credit card purchases unless you convert them into EMIs. Similarly, most BNPL providers do not levy any processing fee on your purchases unless you opt for repayment via EMIs.

3. Credit Limit:

As per the Reserve Bank of India (RBI), OTP-based KYC sanctioned loans cannot exceed the amount of Rs 60,000 per year. Since BNPL schemes are based on OTP-based KYC, one cannot avail more than the regulated credit limit. At the same time, the credit card limit depends on your annual income and credit score. Therefore, you can get the maximum limit on your credit card and use it for bigger purchase transactions.

4. Eligibility:

Credit cards follow stringent eligibility criteria that include income proof, minimum income requirement, good credit score and credit history, etc. If you do not fulfil the eligibility requirements then your credit card application will be rejected. Whereas, Buy Now, Pay Later schemes do not have such strict criteria. In fact, the process is quick and straightforward if you go for BNPL schemes offered by Fintech companies or e-commerce companies. As already stated, you simply have to register for free and provide the required basic details, and your line of credit will be ready to use. That is why BNPL is gaining more popularity amongst young people who do not have access to credit cards.

5. Convenience:

The application process of a credit card is time-consuming and tedious, as it involves multiple verification criteria. Credit cards usually take 3-4 weeks to process the application. Whereas, in comparison, the BNPL application is easy and quick. You get access to your line of credit within a few minutes.

Moreover, using BNPL while shopping is just one OTP verification away. On the other hand, while using a credit card for shopping online you will have to enter details like, the entire credit card number, card holders name as on the credit card, expiry date, and CVV. Additionally, for final verification, it will ask for an OTP sent to your registered mobile number. Therefore, the multiple levels of security protect you against any misuse of the card. However, if you are in a hurry, it can be a time-consuming process.

6. Acceptance:

Buy Now, Pay Later schemes offered by Fintech companies are limited to the merchants they have tie-ups with. Similarly, BNPL schemes of e-commerce companies are limited to their own set of companies. So, you cannot use this facility to make purchases outside their partner companies. For example, if you have an Amazon PayLater limit of Rs 10,000, you can utilise this limit only for the purchases done from Amazon. You cannot use this credit limit to buy something from any other merchant. In contrast, credit cards are accepted worldwide. You can buy from almost every merchant, online or offline, through a credit card.

7. Offers:

Both credit cards and BNPL schemes offer different rewards and cash back for the purchases done through them. However, one needs to check which one of them is offering more value before making a purchase.

8. Default In Payment:

Credit cards as well as BNPL schemes can reduce your credit score, if you default on the repayment or consistently delay your payments.

How to choose between Credit cards and BNPL?

Now that we have understood the similarities and differences between the credit cards and Buy Now, Pay Later schemes, it would become easy for you to compare them while making a purchase. It is advisable to consider the below points while comparing and choosing between these two payment methods:

• The payment method accepted by the merchant

• Rate of interest charged, if any

• Processing fee on the transaction, if any

• Cash back and rewards offered

• Convenience to make the payment

To Conclude:

Credit cards and Buy Now, Pay Later schemes have their own advantages and disadvantages. If you are eligible for credit cards, it is advisable to apply for one, as credit cards have higher credit limits, which is necessary for high-value purchases. And, if you already have a credit card, then you also get to choose from these options of payments. While making any purchase, you should check which one offers more value and choose your payment method accordingly. In most cases, BNPL schemes are ideal for low-value purchases, whereas it is advisable to use a credit card if you wish to convert the transaction into long-term EMIs. Notably, banks charge lower interest rates for long-term loans/EMIs on credit card compared to BNPL. However, if you do not qualify for credit cards, you can still take advantage of BNPL for low-value purchases.

It is essential to have control over your spending’s when the companies/merchants are constantly promoting such tempting offers. However, if you are a responsible spender, you can use both options to maximise the benefits and make the most of each option. The key is to use the correct payment method considering the situation and your convenience.

This article first appeared on PersonalFN here