Buy now pay later vs credit cards: Which is a better option

Over the years payment methods have significantly evolved. From coins to paper currency to plastic currency like debit cards and credit cards. The newest one to join the bandwagon is 'buy now pay later services. This service has been started by a number of e-commerce sites and fintech startups making it easier for consumers to buy on credit.

The BNPL is a financing option that allows shoppers to make purchases and pay for them at a later date with an interest-free period. It gives them a cushion period for the customers to come up with the money to pay for the products. The repayment period can vary from 15 days to 2 years depending on the cost of the product and the offer given by the lender.

While some offer interest-free full payment up to a specific time, others convert the total amount into EMIs to be paid at regular intervals. It is an easy way to procure credit and usually just requires filling a KYC with a PAN card.

While the basic concept of BNPL is very similar to credit cards. Both credit cards and BNPL offer credit to shoppers to buy items and have an EMI option to pay back the owed amount. However, there are major differences in the fine print.

Let's understand how they differ

Interest-free period: Usually when you purchase an item using your credit cards, the interest on your purchase starts accumulating as early as the next day. While some credit cards do offer an interest-free period, many don't. While in the case of BNPL, shoppers generally get an interest-free period between 15-10 days to pay back the entire amount owed without attracting any penalties. In case of a default, penalties are incurred depending on the amount owed. 

Like in the case of Flipkart Pay later, you can buy an item using the scheme but have to pay it back by the fifth of next month. Till the 5th, the amount owed is interest-free. In case you don't pay back by that date, you will have to pay additional penalties. In some cases, this period is higher like for Uni, a BNPL lender, customers can enjoy an interest-free period of up to 3 months.

Fees: Credit cards also have basic fees attached to them like joining fees, annual fees, some even have penalties if less than a certain amount is spent every year using a credit card. However, BNPL does not have any associated fees with it. They do not charge any processing fee or joining fee.

Process: the joining process for credit cards is very complicated. You have to fill a long-form, see how much credit you can get depending on your credit score, verify your address, some may even need you to visit a bank, etc. After all the hassle, the bank has to approve and the issuing takes at least 2 weeks. This is not the case with the BNPL scheme. The processing of a BNPL is completely digitised and happens in minutes. You only have to fill a KYC form and submit your pan card for you to utilise this option.

Interest rate: Credit cards have one of the highest interest rates in comparison to any loans. They usually charge between 28 percent to 35 percent interest rate per annum. But in the case of BNPL, interest is charged if the customer defaults payment in the interest-free period and in case of a longer duration of repayment, like conversion to EMIs. It must also be noted that the interest rates charged by BNPL are usually lower than those charged by a credit card.

Eligibility criteria: Credit cards have a very stern eligibility criterion. People with low credit scores cannot be issued credit cards. Your ability to pay back is thoroughly checked through bank statements and payslips. This is not the case in the BNPL option. Their eligibility criteria are far more relaxed. A number of individuals who do not meet eligibility criteria for a credit card very easily get the BNPL option to purchase stuff.

Credit offered: Credit cards usually offer higher credit than BNPL. As per RBI regulations, only ₹60,000 per year can be loaned under OTP-based KYC. So a BNPL option does not offer credit higher than that. But that is not the case with credit cards. Your credit limit can go very high depending on your financial history and credit score.

Flexibility: BNPL option offers higher flexibility than credit cards. On a credit card, you must pay the minimum due balance to avoid penalties. but in BNPL, depending on the offer you choose, you can get a longer duration to pay back your loan without any interest.

What should you do?

Deciding which option to take between credit card and BNPL must be based on your financial situation. Before choosing either of the options it is very important for you to compare interest rates and tenures offered. Even if you already have a credit card, if you are getting a better deal under the BNPL option, you should go for that.