Easy to get loans are what you don’t need
Getting loans has never been easier. Everywhere you go there are different forms of loans available for any kind of purchase. While these, Buy Now, Pay Later (BNPL) programs are becoming more and more popular. And why not? They offer interest free loans that can be repaid in equal installments over 6 to 12 months.
BNPL makes shopping easier for consumers by deferring payments into the future. BNPL is also gaining ground as there is no high interest payable and credit scores are not that important to accessing the program.
Retailers are happy with the increase in sales, financial institutions are happy to provide loans and BNPL is customer friendly because they don’t have to worry about negotiating interest rates.
But there are many hidden risks that borrowers need to think about.
These loans encourage bad spending habits and can cause people to splurge or spend more than they can afford. Buying a television costing Rs 1,000,000 under BNPL and paying Rs 25,000 per month is like a good deal!
Surveys abroad have found that half of BNPL buyers increased their spending by 10-40%, and a majority spent on items they might not otherwise have purchased. BNPL can also force consumers to take on much more debt, even for small purchases, which often becomes a vicious cycle leading to the debt trap.
BNPL are unsecured loans and having many loans of this type will have an effect on credit scores. With many loans, it also becomes difficult to keep up with payment deadlines and defaulting on payments will lead to a drop in credit score. Not to mention all the pesky fundraising calls that were about to start.
Failure to pay also means late fees and penalties. Many times the BNPL scheme is for a short period and the borrower may want to extend the scheme later. On this point, the cost of interest is 12 to 28 percent per annum. The longer the mandate, the higher the interest charged. Add to this the 2-4 percent processing fee, the total cost is much more than 20-30 percent pa
The problem with easy loans is that you have to take them over and over again. Young people use BNPL as a means of instant gratification. Covid has only made that feeling of living only once and enjoying life to the fullest even if it means being on loan. At the end of the day, easy loans lead people to never develop good credit habits.
The next time you think about buying something under BNPL, ask yourself if you really need it. As in all other aspects of life, the right balance is important. Even if you are using BNPL, make sure you pay back on time and don’t make a habit of buying on BNPL all the time. Better to have less than to struggle with loans.
There are things in life that are not worth risking, no matter what the payoffs.