BNPL vs Credit Cards: What Happens When You Default On Payment?

No documentation, instant credit, and less dependence on credit scores have made BNPL a popular payment option among the millennials and self-employed people who do not have access to formal credit. To cater to this rising demand, many banks, eCommerce platforms, and other lenders have launched BNPL offers for the upcoming festive season. A large number of borrowers can now enjoy the short-term credit offered through BNPL even without a credit history. Before opting for the BNPL scheme, you need to keep in mind that you should be able to make the repayments of the BNPL offer on time. Else, like any other loan default, it will have a negative impact on your credit score.

BNPL And Credit Cards: Similarities

The similarities between BNPL and credit cards are as follows:

  • Both credit card and BNPL lenders offer interest-free periods.
  • A credit card provides you with the option to convert your purchase into equated monthly installments (EMIs). It spans over several months, mostly up to 12 months. Similarly, you can also get the option to convert into EMIs (often for a short period) from BNPL lenders at the time of buying. There are also BNPL lenders who offer the option to pay through EMIs for longer durations like 3 months to 12 months. But, one important thing to keep in mind is that not all BNPL lenders offer the option to convert the payment into EMIs. So, do verify with the lender or read through the terms and conditions to find out.
  • While some credit cards are free, many come with charges, such as a joining fee and an annual fee. For the premium cards, the charges may be on the higher side. Similarly, BNPL options are accompanied.
  • with and without such fees. Bank-led BNPLs typically do not charge a processing fee for joining which is often charged by other players.
ParameterBNPLCredit Cards
Interest-free periodFor BNPL, the interest-free period is up to 15 days. However, certain BNPL lenders are now offering up to 45 days of interest-free period. In fact, some even offer longer interest-free periods. For instance, Uni, a BNPL lender, gives its consumers an interest-free credit period of 3 months using its PayLater card.Credit cards are usually accompanied with an interest-free credit period of up to 45 days.
Interest chargedWith respect to BNPL schemes, the interest is charged only when you choose a longer duration of repayments beyond the interest-free credit period. The rate charged by BNPLs that are led by banks seems to be lower in contrast to such schemes provided by Fintech players. For example, HDFC Bank charges Rs 70 as interest for a duration of 30 days on a purchase of Rs 3,000. If you compute the annual interest rate it is 28%. Whereas the maximum interest charged by many fintech players is around 2.5% per month which is 30% per annum.Credit card interest rates are among the highest of any kind of loans, whether it be secured or unsecured. The revolving credit on a credit card is often 3% to 3.5% monthly which comes out to be 36-42% annually. However, there may be some high-risk borrowers where BNPL lenders may also charge similarly high rates of interest.
Eligibility CriteriaEverybody applying for a credit card will not be able to procure one as card companies and banks deny approvals to applicants who do not meet the stringent eligibility criteria.Consumers can get credit through the BNPL option with ease. It does not have strict eligibility criteria
Payment experience and application processCredit card application process is tedious and not everybody will have access to credit cards.BNPL offers a better payment experience. Also, Consumers can create a BNPL account immediately without issues.
Segments of people who preferThere are multiple consumer segments, such as self-employed and lower-income that are not preferred by credit card lenders.Lower-income groups and self-employed people prefer the BNPL option.
Credit card offers higher credit than BNPLWith regards to credit cards, if you have a pre-approved higher limit, then you can always go for bigger purchases and expenses. Credit cards also provide you with the facility to swipe above the credit limit, but this comes at a higher cost and can have an adverse impact on the credit score.According to RBI rules, for BNPL, the overall shopping usage on these platforms is limited to a total of Rs. 60,000 in a year without completing the full KYC. If your requirement is huge, then you may either go for full KYC or look for other methods of financing.

BNPL And Credit Cards: Differences

What Will Happen When You Default on BNPL or Credit Card Payments?

 When you default on a payment, the lender will charge interest on the unpaid payment. You may also be levied late payment fees. You may be levied prepayment charges if you pre-close a loan. Currently, there is no standard procedure followed by BNPL players. The charging structure varies across companies.

Your credit card account will not be marked as default if you miss the payment for the first time. Some banks will even give extra grace periods after the payment due date during which no late payment charges will be levied. For instance, HDFC bank gives a grace period of 3 days after the due date. Post the due date, if no payment is made, the issuer will begin sending reminders via SMS, email, or phone call.

If you still do not pay the minimum amount due, then you will be marked overdue for the number of days that you have not paid the credit card bill. Afterwards, the credit card provider will multiply their efforts to collect the debt from you. You will get frequent phone calls, SMSs and emails. After 90 days,  recovery agents might pay you a visit. Some credit card providers may file a police complaint or send a legal notice whereas others might offer you a compromise in the form of a one-time settlement.

If you do not pay off your bills for 190 days, that is, for a period of over 6 months, your credit card account will come under the recovery pool. This is the final step the bank can take. Under this situation, the bank has deemed your account as a Non-Performing Asset (NPA). This implies that the bank sees your credit card account as a loss. Considering this, they may file a lawsuit against you or sell your debt to a debt collection agency.

Conclusion

The recent pandemic has quickened the adoption of BNPL services. The other important reasons for this include simplicity, ease of usage, convenience, and safety features that come with this mode of payment. Tech-savvy consumers, millennials, and Gen Z consumers are increasingly leaning forward toward the idea of micro-credit and buy now pay later services for a seamless user as well as merchant experience.

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