Buy Now Pay Later (BNPL) and Credit Score: What You Should Know

Buy Now, Pay Later (BNPL) is a financing option that allows borrowers to purchase products now and pay later. They can then repay the amount in instalments over a short period. In many cases, BNPL involves minimal or no traditional credit checks and may be interest-free if repayments are made within the specified time frame.

However, BNPL is accompanied by risks such as late fees and possible overspending when not managed correctly. Additionally, repayment behaviour on BNPL plans can influence your credit profile, making it important to understand how BNPL affects your credit score. In this blog, we will understand the pros and cons of the buy now, pay later financing option.

What is Buy Now, Pay Later (BNPL)?

BNPL is a short-term financing program that allows consumers to purchase goods without necessarily paying the total price at the point of sale. The payment is split into smaller instalments, paid over a week or a month. This service would be interest-free if you pay on time, thus it is appealing to first-time borrowers. This financing option has been made very easy and readily available through pay-later apps.

In India, popular options in the pay-later category include ZestMoney, LazyPay, Simpl, and Amazon Pay Later. These sites are not credit-checked and are therefore open to students and young professionals with no credit history. The retailer is paid in full in advance through the pay-later apps, and you will pay the balance in instalments.

How Does BNPL Work?

Most BNPL programmes offer short-term credit with fixed instalments spread over a few weeks or months. If a retailer supports BNPL, customers can select it at checkout or use it with certain credit cards that offer BNPL or instalment features.

The BNPL provider pays the merchant upfront, and the customer repays the amount in instalments, sometimes with an initial down payment. While many BNPL plans are interest-free when payments are made on time, late fees or other charges may apply, making responsible use essential.

Impact of BNPL on Your Credit Score

Buy Now, Pay Later (BNPL) can affect your credit score, depending on how the provider reports your repayment behaviour to credit bureaus. While many BNPL plans do not require traditional credit checks, late or missed payments may be reported, which can affect your credit score.

On the other hand, timely repayments demonstrate financial responsibility and can help maintain or even improve your credit profile. It’s important to manage BNPL responsibly, as excessive use or delayed payments can impact your ability to access other forms of credit in the future.

Pros and Cons of BNPL

BNPL is quite popular among millennials and Gen Z for buying expensive products. There are many pay-later apps in the market, allowing you to buy products without much cash. It has many pros and cons, which are as follows: -

Pros of BNPL

Here are some Pros of BNPL: -

• Completely Online

The entire process is online. You can register anywhere and be instantly verified with e-KYC. This convenience eliminates paperwork and enables transactions to be completed simultaneously.

• Smaller Payments

BNPL breaks large payments into smaller ones. There is no need to have the entire amount as cash before purchasing expensive goods. The service divides your purchase into weekly or monthly payments, making budgeting easier.

• Zero Percentage Financing

If you pay instalments on time, you do not incur any interest. This free financing will make BNPL appealing to individuals who do not want to make additional payments. It offers an efficient way to acquire and purchase expensive products at a lower cost.

• No Credit Check

BNPL companies do not run a credit check. This is an advantage for young professionals and students with no credit history. The service is open to you whether or not you are creditworthy.

• Cons of BNPL

BNPL is convenient; however, it may not always be a good option. Let’s go through some of the Cons of BNPL service: -

• Potential Fees

Failure to pay an instalment will attract a late fee or interest. If you default on all payments, the provider may charge additional fees and interest for the entire period, which can adversely affect your credit score.

• Risk of Overspending

BNPL is listed on numerous retailers for large purchases. Payment is made later, hence you may buy several things on the spur of the moment. Handling multiple instalments at once can be challenging and place an extreme strain on the budget.

• Doesn't Build Credit

BNPL services are not registered with credit bureaus. Thus, buy now, pay later will not help your credit score. You forfeit the chance to develop creditworthy behaviour by paying responsibly.

• Limited Regulations

BNPL does not receive the regulatory oversight applied to credit cards. This implies that you have fewer consumer protections in the event of a dispute. It is important to know the terms and conditions for using these services before using them.

To Conclude

BNPL makes large purchases more affordable by allowing borrowers, especially young and first-time users, to spread payments without an immediate financial burden. It is convenient, often interest-free, and accessible even without a strong credit score, making it an attractive short-term financing option.

However, the ease of access and limited regulation can encourage overspending and missed repayments. Importantly, while some BNPL providers may not conduct traditional credit checks, late or defaulted payments can still be reported to credit bureaus. This can potentially affect the credit score and future borrowing ability. Using BNPL responsibly and repaying on time is essential to avoid financial stress and protect your credit health.

Want to know where your credit stands? Check your CIBIL score with Poonawalla Fincorp today to stay informed and make smarter borrowing decisions.

Read Also: Why Your CIBIL Score is Low Despite Paying Bills On Time

FAQs

Is BNPL a good option?

BNPL only works when you can pay on time and spend your money wisely.

Why is BNPL growing?

BNPL is growing due to its flexible payment terms, instant approval, and no credit checks, which are attractive to younger customers.

Can BNPL replace credit cards?

BNPL is not ready to replace credit cards, as they serve different purposes and offer distinct financial benefits.

Do I have to make a down payment with BNPL financing?

Yes, when you check out, the first payment is a down payment. It is around 25% of the purchase cost.

How do BNPL companies make money?

Failure to pay on time results in late fees, interest charges, and even a ruined credit rating.