Buy Now Pay Later (BNPL) offers a consumer to buy the products and pay for them at a later date. There is a specified period in which the consumer has to pay. It is mostly paid back in installments. If the customer pays back on time, they don’t have to pay any interest. You can also call it interest-free finance. There are many companies and platforms which allow you to shop without worrying about the payments. This is very different from traditional loans which always had an element of interest that was added to the amount. Though BNPL schemes are generally interest-free, there are some costs involved. It will differ from company to company. Some schemes seem so attractive that people sometimes are ready to give up their credit cards.
How Does BNPL work?
This works in almost the same way many retailers give you interest-free when you buy from them. They generally spread the cost over 12 months or any other specified time. These are called Equated Monthly Installments (EMI). The main difference is instead of these retailers financing your purchases; now it could be a third party. Moreover, this also allows you to shop from a variety of shops instead of buying from a single retailer.
A huge amount of people all over the world, especially in Australia are switching to BNPL focused payment methods. Clever Shop List covers it extensively with most people buying mobile phones using BNPL. First, you have to sign-up either online or in-store. Some lenders work with certain stores only while others may allow you to shop anywhere. Once you have shopped, now you can start paying back. It is usually in the form of regular installments and is automatically deducted from your account which you have shared with them.
What Are The Problem Areas?
Though these loans are interest-free, there could be a catch. Some problems which could make it not so great are:
- Late payments are one of the ways that these companies make money. The account which you have linked to the payments should always have enough funds. If you default, they will charge late fees, and if you continue to default, they may take the item back.
- These loans are given immediately, so there is not much time for proper background checks. This could lead to fraud. Some people can take the loan quickly and not repay. Some employees of the companies may allow fraud to happen if they get a part of the money.
- Most of these loans are given without any paper trails. There are hardly any documents. This could be good in most cases, but in some cases, it may prove to be detrimental.
- When you get an interest-free loan, the retailers are charged some amount per transaction. Sometimes this benefit may not be passed on to the consumer.
- If a consumer gets trapped in the debt trap, it is challenging to get out of it. It has destroyed many people’s lives.
- There are more chances of underhand deals happening. The retailer and the third party in cahoots can cheat the government of taxes and rob the customers of fair deals.
- Some lenders may not charge interest but charge other fees. They could call it a processing charge or account maintenance fee. Consumers should read the fine print carefully before signing on and taking a loan.
- Most lenders will ask for a minimum repayment amount. This amount is generally small enough so that the consumers are not able to repay the loan within the interest-free period. Very soon you could be charged a very high rate of interest.
- Hidden charges on every transaction could be adding up. Make sure that you check all the clauses before you decide to take a loan.
- Even if it is only a product that you are buying and that too, interest –free, it can add to your credit history. If you default on any payments, it can always be there on your credit record. It is better not to overuse these services and also to pay on time.
Apart from these, there could be other problems which could crop up. Now, many governments are trying to bring “Buy Now Pay Later” under stricter regulations. There were already some rules and laws, but there have been many complaints from consumers. Many people have fallen into financially bad times because of some bad practices followed by the retailers and third-party financiers.
Many people who are unable to make the payments on time due to some genuine reasons find that it is almost impossible to get any kind of leeway. Some people who are in urgent and dire need of money because of some serious issues may then end in financial ruins as well. This is why the call for more regulations on BNPL is growing louder. Yes, the consumers can benefit, but the biggest beneficiaries are the retailers and the third party lenders. They run this scheme in such a way that they make a profit every time you decide to shop.