As India experiences rapid digitisation in the goods and services space, there is a constant influx of attractive deals and discounts seen on online shopping. Whether it is Amazon’s Great Indian Festival or Flipkart’s Big Billion Days, these and various other platforms offer all year round deals on various products and services.
Even if it’s not actually the discounts that attract consumers towards shopping, the steady stream of ads combined with easy financing options often entice them to indulge in a shopping experience. Almost all categories of products are offered with an EMI (equated monthly instalment) option. There is also the buy now, pay later option in various shopping categories.
Buy now, pay later or the BNPL scheme effectively enables a consumer to shop for a product today irrespective of whether he/she has the required money to pay for it since it allows them to pay it back at a future date.
How does the BNPL scheme work?
A BNPL scheme is similar to other payment options available on e-commerce sites like Flipkart, Bigbasket, Zomato, Swiggy, Goibibo, etc. Under this, all purchases made during a billing cycle are consolidated and one can pay for it later. The scheme allows consumers to make small-value transactions during the billing cycle.
Buy now, pay later (BNPL) is an innovative financing scheme for consumers to avail credit. It has been widely popular across the globe since it allows users to segregate payments into smaller installments, thereby avoiding financial burden at any point.
Why is BNPL to be used with caution?
Like any other financing scheme, this scheme too has to be used with caution since it means you are committing towards monthly payments and thereby increasing your debt.
While BNPL can be beneficial in the short term, the debts can easily add up to a large amount and begin hurting one’s credit standing in the long run.
What are the dangers of the buy now pay later scheme?
Here are some of the negative effects of using too much debt through BNPL or buy now pay later schemes:
Impact future financial goals
One of the major ways in which too much usage of BNPL for shopping can hurt is that it impacts your ability to invest towards your future financial goals. Retirement is one of the most important life goals for any individual. However, if you put away your savings by shopping through BNPL thinking that retirement is too far away, it could mean financial difficulties at an age when you cannot earn.
Too much debt results in a large chunk of your monthly income going towards debt repayment. This results in a lack of funds for investment towards your future.
Affects quality of life
When you take on debt, you have to pay the EMI every month until it is repaid in full. While BNPL can offer the short-term joys of shopping freely without any worry, it can result in unimaginable long-term dangers. For individuals who have a low level of debt, this may not be a cause for concern. However, as the overall debt taken increases, the constant monetary outflow can easily start taking a toll on one’s financial health.
The financial stress of increasing debt can result in many negative effects, including an impact on one’s health. It can have effects on how you manage your work and family, thereby impacting your quality of life.
Lowers credit score
The credit score determines one’s creditworthiness and is impacted by several factors. Multiple debts or a high amount of outstanding debt can easily lower a person’s credit score. Since BNPL is a form of debt, it gets recorded in one’s credit history and impacts the credit score. This can further harm your ability to borrow in the future.
Affects priority expenses
It’s very easy to be tempted to buy the latest phone or an appliance using the BNPL scheme, especially if the EMI amount looks small. However, making such expenditures can result in your monthly payments towards debt shooting up and leave little for covering daily priority expenses.
Reckless usage of BNPL combined with late payments can jeopardise one’s credit standing and significantly hurt the chances of availing best credit facilities in the future. Therefore, you must know how to manage your finances well within your financial capability rather than entirely depending on these credit schemes. A well-informed credit usage and maximum financial discipline are important to maximise the value of buy now pay later.
Apart from this if you are interested to know about Using Buy Now Pay Later Schemes for Shopping? Here’s How it Can Hurt in the Long Run then visit our business category.