A New Era Of Lending: Is It Good Or Bad?

By sourjyadipta | August 13, 2021

The lending industry has evolved with time, and now thanks to BNPL plans, the world has more options to pay for its needs than ever before.

Everything You Need To Know About P2P Lending

Recently, Square Inc., an American fintech firm acquired Afterpay Ltd., an Australian buy now, pay later provider (BNPL) for a staggering $29 billion. BNPL is a phenomenon that is taking the world by storm. In recent years, it has slowly become a prominent form of financing in India too. BNPL is a short-term point-of-sale installment microloan. From ordering food to shopping for clothes to getting gadgets, you can purchase pretty much everything the internet offers with it. Generally, buy now, pay later plans are zero-interest loans unless the dues are not paid on time. However, customers may need to provide authorisation that allows the lender to deduct the installment from their linked bank account on a certain date of the month.

Additional Reading: Personal Finance In The Post COVID-19 World

What Does The Data Say?

With the pandemic hitting hard, online shopping has seen a monumental rise in the last year. In India alone, there are more than 75 million consumers who shop actively on the internet without a Credit Card. Coupled with cheap data prices and the abundance of smartphones, awareness about e-commerce and cashless digital payments has increased in Tier-2 and Tier-3 cities. That in turn, has created a whole new base of tech-savvy customers looking to make purchases with minimum effort. These new-age lenders challenge the traditional lending industry by offering no-cost EMIs in a more consumer-friendly model. The system has enabled customers to buy aspirational products with ease. Fuelled by rising demand, the Indian online industry is poised to become a $99 billion market, according to Goldman Sachs. At the same time, BNPL is slated to become the fastest-growing online payment method. According to forecasts, BNPL is set to grow from a 3 percent share in 2020 to 9 percent in 2024.

Why Is It So Appealing?

Traditionally, financial institutions or lenders underwrite risks associated with lending. Due to strict eligibility criteria around access to formal finance, a sizeable amount of people have zero or little credit histories. This has created a gap in the market. BNPL fills that void by offering credit without the stringent scrutiny of regulatory bodies. The ease of access to credit attracts younger users from all sectors and backgrounds. One of the biggest reasons for BNPL challenging the Credit Card industry is the fact that banks require much more information about their customers.

Why It May Possess Risks?

We need to consider a few factors when opting for BNPL as a line of credit. Critics of the system say it requires regulatory intervention. While the ease of access to credit may seem advantageous, it does possess a fair amount of downsides if left unchecked. It may attract the attention of the Reserve Bank of India for its disclosures around loan products and marketing their offering as a payment service, rather than as a credit product. Other concerns circle consumer behaviour. BNPL plans may lead to impulse buying and overspending. These services require minimum authorisation for a payment to go through. It eliminates the need for OTPs and other standard protocols in place.

Additional Reading: Should You Get A Credit Card When You Start A Job?

Moral Of The Story?

Credit Card providers charge their users with late payment fees and hefty interest rates if the user is unable to pay their dues on time. This may seem to work in favour of BNPL providers but at the same time, stringent rules and regulations create a sense of financial responsibility amongst its user base. Indeed, BNPL providers have made online shopping easy for new-age consumers. They are strategically placed at checkout points of e-commerce websites where a single tap lets a user buy the latest phone or whatever they desire. The easier it is for people to get financing, the easier it becomes for them to overspend. In case of inability to pay on time, BNPL providers may charge hefty interest rates.

Another cause of worry is the fact that BNPL lenders report to credit rating agencies, and late or missed payments could lead to a lower Credit Score. In the long run, when a person needs a more serious loan like a Home Loan, other financial institutions like banks will first study their Credit Score to check their creditworthiness. Getting that laptop early may seem like an easy process thanks to BNPL, but one must remember that the laptop doesn’t come for free. When you opt for a BNPL plan, you opt for liability. You buy now, but ultimately, you pay for it now or later.

Which Form Of Credit To Choose?

Although BNPL may seem like a good option because of the ease of access. However, it should be kept in mind that getting a line of credit requires some sort of financial discipline. Credit Card companies are strictly overlooked by regulatory bodies and because of the terms and conditions around them, users tend to think twice before making a purchase. Credit Cards offer a host of benefits. Their loyalty programs often provide customers with freebies that BNPL providers don’t. From free movie tickets, to access to airport lounges, to extra reward points on shopping, the list is endless. One may also choose to opt for a Personal Loan because of the structured repayment system and fixed interest rates. These loans are disbursed fairly soon too. Any form of credit should be chosen wisely. The traditional forms of lending provide more protection to customers alongside promoting healthy financial habits.

Looking for a safer and a more regulated line of credit? Get the best Credit Card tailored for your needs here.

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