'Buy Now, Pay Later' Schemes: Are They Useful Or Another Debt-Trap In Disguise?

When credit cards were introduced, there was a lot of scepticism about this new approach to boost consumerism. Gradually, people began believing that credit cards, if used wisely, could be of great use in meeting their household and personal expenditure needs. In recent years, however, a new approach to financing new purchases has come into vogue. You must have noticed e-mails flooding your inboxes and nudging you with exciting offers to make a fresh purchase. Several finance companies and e-commerce players are offering schemes that allow consumers to ‘buy now and pay later' (BNPL).

The Covid-19 pandemic has accelerated the rise of these BNPL schemes, as many people have been struggling to manage their finances. While the acceptability of credit cards is on the rise, especially among millennials, how credible are these BNPL schemes? Are they worth taking advantage of or merely debt traps?

What are BNPL schemes?

These schemes allow consumers to buy products and make payments by the end of a stipulated time period. Consumers will have to buy products from only merchant partners of the BNPL service provider, and if they fail to repay on time, interest charges will be levied depending on the bill amount. Amazon Pay, ZestMoney, LazyPay, Simpl, and Slice are some of the companies offering BNPL services.

What are the advantages?

As an alternative to credit cards, these schemes offer a short-term extension on payment. These schemes could be beneficial to those who wish to make a purchase in the middle of a month but have no option other than to wait till their salary gets credited.

What are the problems?

Anyone who uses schemes like these must be careful to not default on the due date. Doing so attracts penalties or interest charges that could go as high as 30 per cent yearly. In most cases, these charges are calculated daily. Defaulting may also adversely impact credit scores and could lead to problems in availing of loans later.