BNPL: Limit instalments to 10-15% of income and restrict usage to two plans

Those with multiple loans, irregular earnings, or poor repayment habits should avoid this form of quick credit

This festive season, India witnessed a sharp uptick in demand for quick credit, with digital lenders reporting up to a 50 per cent rise in festive loan applications. Interestingly, even higher-quality borrowers are tapping into short-term credit options for convenience and flexibility. Even as demand gathers pace, borrowers need to ask if Buy Now Pay Later (BNPL) is right for them.

 

How BNPL works

 

BNPL is gaining popularity for purchases like mobiles, gadgets, and household items. It lets consumers buy instantly and pay in instalments over a few weeks or months.

 

“At checkout — online or offline — the customer selects BNPL, where a fintech platform (or a partner bank) pays the merchant upfront, and the buyer repays in scheduled instalments, often interest-free initially. Spending limits are set based on the user’s creditworthiness, transaction history, and spending behaviour,” says Raoul Kapoor, co-chief executive officer (co-CEO), Andromeda Sales and Distribution.

 

Pros and cons of BNPL financing

 

BNPL services offer quick, hassle-free microloans for consumer purchases with minimal documentation. These short-term loans are approved within minutes, allowing buyers to split payments into small instalments or defer them — helping manage spending better, especially during festive sales and discounts.

 

“For disciplined users, it’s a handy cash-flow tool to manage big or unexpected expenses and build short-term purchasing power. With interest-free periods, simple digital onboarding, and clear repayment terms, BNPL offers an affordable, convenient option for small-ticket financing,” says Kapoor.

 

However, BNPL services should not tempt you into overspending. “Easy credit and zero-interest offers are useful only when used with discipline, not for impulsive buys. As such, plan purchases, stick to your budget, and use BNPL wisely to avoid financial strain or credit-score impact,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.

 

Impact on credit score

 

The impact of BNPL on credit scores depends on how providers report data. Fintechs and partner banks that share repayment records with credit bureaus can help boost scores in case of timely payments, but missed ones can hurt. “Even if a provider doesn’t report yet, past defaults may show up later once reporting begins,” says Kapoor.

 

“Before choosing a BNPL plan, therefore, check its credit-check policy — some providers run a hard inquiry for every purchase, which may negatively affect your score,” adds Shetty.

 

Checks to run

 

Before opting for a BNPL plan, treat it like any formal credit product. Read the terms carefully — especially repayment tenure, post-grace interest rates, and late fees. Check if it’s genuinely interest-free or only during a promotional period, and note any processing charges. “Understand the repayment schedule to avoid cash-flow issues, and ensure sufficient balance for auto-debits to prevent penalties,” says Kapoor.

 

How fintech BNPLs differ from e-commerce offers

 

While fintechs focus purely on lending, e-commerce players leverage customer insights and product margins to offer better deals. They can cross-sell more effectively and often absorb fees, making their BNPL plans cheaper overall. “Though both compete for borrowers, e-commerce BNPLs usually have an edge in processing costs and effective interest rates,” says Santosh Joseph, chief executive officer (CEO), Germinate Investor Services.

 

Red flags to watch out for

 

Before signing up for a BNPL plan, read the fine print carefully and watch for red flags like unclear repayment terms, hidden fees, or marketing that downplays default costs.

 

Late payments can attract 30–40 per cent annual interest plus penalties. “If auto-debit is enabled, maintain sufficient balance to avoid double charges. Also, watch for clauses shifting all responsibility to users, unexplained credit rejections, or automatic credit-bureau reporting that can hurt credit scores,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Joseph adds that even so-called interest-free plans often include hidden costs. Many BNPL tenures run for six to eighteen months, and fees can add up. Clarify what “zero interest” and “no processing fee” truly mean to avoid surprises later.

 

Who should use BNPL — and who shouldn’t

 

Used wisely, BNPL suits disciplined borrowers with steady income and short-term cash gaps, especially for small or essential purchases. “It should, however, be avoided for discretionary spending or by those with multiple debts, irregular income, or poor repayment habits. Students and impulsive shoppers are more prone to misuse it, as easy credit can encourage overspending,” says Deepak Kumar Jain, founder and chief executive officer (CEO), CredManager.in.

 

Repayment tips to avoid debt traps

 

To use BNPL wisely, treat every deferred payment as a liability and include it in your monthly budget. Keep instalments within 10–15 per cent of income to avoid strain. “Set reminders for due dates, maintain balance for auto-debits, and track total dues regularly. Clear high-interest debts first and avoid using multiple BNPL platforms at once. Treat BNPL as short-term credit, not free money, to stay debt-free,” says Jain.

 

Limit BNPL use to a maximum of two plans for easier tracking. “Ensure total BNPL, credit-card, and EMI payments don’t exceed 30–40 per cent of monthly income. Set up auto-pay only after confirming sufficient balance, and keep a buffer equal to one month’s dues to avoid penalties and overdraft charges,” adds Kumar.

 

Building credit without overborrowing

 

When used wisely, BNPL can be a smart financial tool. For those who manage their cash flow well, it offers easy access to discounts, zero-EMI deals, and no processing fees—making purchases more affordable without immediate financial strain.

 

“However, use it only for essentials, plan repayments carefully, and avoid over-leveraging. Used wisely, it’s a smart credit tool; used carelessly, it can quickly become a debt trap,” says Joseph.

 

Kumar advises treating BNPL as a loan, not free money. Use it only if you can afford the full amount upfront and for essential, planned purchases—not impulsive or recurring ones. “New users should start small to understand repayment cycles. If your income can’t comfortably cover repayments within the tenure, BNPL can do more harm than good,” he warns.

 

Key checks before opting for BNPL

 

Check if the offered credit limit (₹2,000–₹1 lakh) suits your spending needs

Understand penalties like late payment fees and interest

Choose reputable providers

Avoid apps seeking excessive permissions

(Source: BankBazaar.com)