For instance, Amazon and Flipkart are not only offering free credit period through the Buy Now, Pay Later option, but they are also giving Rs 100 cashback. Croma is offering a voucher worth Rs 250 if you make payment through the deferred payment option of ICICI Bank’s Paylater. Many more merchants have similar offers.
Yes, thanks the pandemic many of us have had to tighten our purse strings, and such BNPL schemes do look attractive. However, one needs to do some number crunching to arrive at the ‘real cost’ of such BNPL offers – in most cases, one will end up paying more than the original purchase cost of the product or service.
So, if you are planning on opting for a BNPL offer this festive season, you need to be mindful of the costs attached.
The real cost of BNPL
There are two ways the lender makes money from your purchase done using the Buy Now, Pay Later scheme.
Merchant discount rate income during credit free period: During the credit free period, mostly between 15 days and 45 days, lenders do not charge customers any interest if the customer pays back the total dues within this period. However, that does not mean that lender does not earn; they earn for this period of lending as well. It works on Merchant Discount Rate (MDR) model, says Vishal Maru, Senior Vice President- Merchant Payment Services, Loyalty and Digital Payments, Worldline India. MDR enables these lenders to offer the interest free credit period under BNPL option.
Explaining its BNPL offer, FlexiPay, HDFC Bank on its website says: “NO Extra Cost for 15 days has been given as upfront discount to cover for interest charged by the Bank, effectively giving you the benefit of NO Extra Cost. Total amount you repay to the Bank will be equal to the invoice amount of your order”.
According the terms and conditions of Flipkart’s BNPL offering on its website, “You acknowledge that as part of its marketing and promotional activities, FAPL may as a part of its promotional offers, bear the interest, if any, charged on the Loan/Pay Later Product sourced by FAPL through the Financing Partner to You.”
A discount of 1%-3% may not look promising to a customer, however, for a lender it presents an attractive business opportunity. So, rather than offering small discount to customers, merchants give this discount money to the financier instead. While on the surface an MDR of 0.75-2.5% may not look big, however, when you do the calculation in terms of annual interest rate, the income appears to be substantial.
|Real Cost of BNPL credit|
|Product Price||Rs 5000||Rs 4000|
|Customer Pays||Rs 5000||Rs 4000|
|Credit free period||15 days||45 days|
|Merchant discount rate for lender||1%||2.4%|
|Lender’s revenue||Rs 50||Rs 96|
|Monthly Interest Rate||2%||1.60%|
|Annual Interest Rate||24%||19.2%|
Cost beyond credit free period
If you wish to go for a longer repayment tenure usually more than 15 days to 1 year using the BNPL scheme, then the lender will offer this via equated monthly installments (EMI) options. Here, you will have to pay an interest and processing fee on your purchase. “We allow the customer to break the BNPL payment due into multiple instalments over a few months. For that feature, we charge 12 to 18% interest and a nominal processing fee,” says Krishnan Vishwanathan, CEO & Founder, Kissht, an instant lending fintech player.
HDFC Bank gives you the option to pay in 30, 60 or 90 days but it charges Rs 70 per month on Rs 3,000 purchase. This effectively means an interest rate of 2.33% per month or an annual interest rate of 28%. “For its (CASHE’s) BNPL offerings, its interest charges start from 0 – 0.75% per month spread across 3 – 6 months,” says Yogi Sadana, CEO, CASHe, an instant lending fintech player.
If you go for longer tenure, the interest rate charged will be much higher. An interest charge of Rs 2.25 % per month, which is 27% per annum, is charged by CASHe on its retail loan products that range from 90 days to 1 year.
For instance, for if you convert a purchase of Rs 5,000 into EMIs for six months at 27% p.a. interest, then total interest that you will end up paying for this purchase will be Rs 401, which takes the total cost of the purchase to 5,401.
Processing fee adds to the cost: While few BNPL players like ICICI Bank or HDFC Bank may not be charging any processing fee, however, many other lenders do charge a processing fee. “The processing fee charges for the retail loan products ranges from Rs 500 to Rs 1,200 or 2 % for the loan amount whichever is higher for the loan products from 90 days to 1 year. PF charges for the BNPL offerings starts from Rs 200 to Rs 600 based on the plan that is chosen by the borrower,” says Sadana.
Since the ticket size of these loans on average remains low, the percentage of processing may be on higher side. “Typical processing fees for a loan varies from 3% to 5% of the loan amount,” says Vishwanathan. Therefore, if the processing fee is 5% then you will have to dole out Rs 250 for a purchase of Rs 5,000 worth of goods.
The total cost that matters: Though the amount of interest and processing fee paid in absolute terms may appear less but if you calculate the annual interest rate of total cost of credit that you are paying then it would come out to be much higher. For a purchase of goods worth Rs 5,000 at 27%,p.a. interest rate for a period of six months you will have to pay a total interest of Rs 401 and Rs 250 as processing fee of 5%, then the total cost will come out to be Rs 651 higher, i.e., Rs 5,651. While the absolute amount may not pinch you but if you do the calculation, the annual interest rate of 44% may hit you.
Mind the high cost of late payments: If you opt to purchase something using the BNPL scheme and default on repayment then you may end up paying a penalty. “In the event the borrower fails to adhere to the repayment plan as set by CASHe, interest is charged for the period the customer’s amount remains unpaid,” says Sadana.
While quantum of the penalty may differ from lender to lender, however, late payment fee is mostly on the higher side. “Consumers can make repayments through a 15-day cycle. In case of an inability to repay, the users will be charged a penalty fee of Rs 15 every day. If there is a considerable delay in payment, the consumer will not be able to use LazyPay services ever,” says Anup Agrawal, Business Head, LazyPay, a BNPL lender.
In case of auto debit failure there will be an additional cost. ICICI Bank’s Paylater states, “In the event if the bank account does not have sufficient funds on the Payment Due Date, the PayLater Customer shall be liable to pay all the charges applicable in addition to the Total Amount Due as generated in the next month’s account statement.”
What should you do?
Buying from own savings is the best course of action instead of using the BNPL route. However, if delaying the purchase is unavoidable then you can consider opting for BNPL.
For purchases below Rs 10,000 the total cost of credit may not be very substantial in absolute terms even at a higher rate of interest. However, it is always better to compare the total cost that includes total interest and processing fee that you would be paying before you make your purchase via the BNPL option.
It is always better to go for only those purchases where you are sure of paying the entire due amount before the due date. If the purchase amount is higher than what you could afford to repay within the free credit period, then it is always better to go for EMI options and compare all available options. Though BNPL option is not without a cost, however, when you compare it with revolving credit of credit cards then the cost that you pay in BNPL can be comparable and even lower in many instances.
Disclaimer: This post has been auto-published from an agency feed without any modifications to the text and has not been reviewed by an editor.