Buy Now, Pay Later or credit card: Which is better for you?

Up until a few years ago, buy now, pay later meant using one’s credit card for purchases. However, in the past few years, we have seen banks, e-commerce companies and even fintech players offer schemes for shoppers called Buy Now, Pay Later (BNPL). The BNPL is a financing option that allows shoppers to make purchases and pay for them at a future date with an interest-free period.

So, how does buying something using a credit card differ from using the Buy Now, Pay Later Scheme? Which one is the more cost-effective method of financing purchases? Read on to find out.

Where BNPL is similar to the credit card

Just like credit cards come with interest-free credit period, most of the BNPL lenders also offer credit free period on these schemes. A credit card gives you the option to convert your purchase into equated monthly instalments (EMIs) spanning over several months, mostly up to 12 months (sometimes for longer, like three years). Similarly, you can also get this facility to covert the payment into EMIs (often for a short period) from BNPL lenders at the time of purchase. There are alsoBNPL lenders that offer the option to pay through EMIs for longer tenures like 3 months to 12 months. However, do keep in mind that not all BNPL lenders offer the option to convert the payment into EMIs. So, do check with the lender or read through the terms and conditions to find out.

How they differ in their interest free credit period
While credit cards typically come with an interest-free credit period of up to 45 days, under BNPL the interest-free credit period is for mostly up to 15 days. However, certain BNPL lenders now offer up to 45 days of interest-free period. In fact, some ever offer longer interest-free periods. For instance, Uni, a BNPL lender, providers its consumers using its Paylater card an interest free credit period of 3 months.

The credit that you can get through BNPL
BNPL Lender	Initial Credit*	Interest Free Period
Flipkart Pay Later	Rs 10,000	up to 35 days
Amazon Pay Later	Rs 10,000	up to 45 days
HDFC Bank FlexiPay	Rs 1000 - Rs 60,000	up to 15 days
ICICI Bank Paylater	Rs 5000 - Rs 20000	up to 45 days
Lazypay Pay Later	Rs 500 - Rs 9999	Up to 15 days
Mobikwik Zip	Rs 500 - Rs 30000	Up to 15 days
* For one month

Which is more costly: BNPL or the credit card?

Fees: While some credit cards are free, i.e., they don’t have any costs attached, many come with charges like joining fee and annual fee, which can be on the higher side for the more premium cards. Similarly BNPL options come with and without such fees. Bank-led BNPL typically do not charge a processing fee for joining which is often charged by other players.

Interest rate: In the case of BNPL schemes, the interest is charged only when you opt for longer duration of repayment much beyond the interest free credit period. As far as interest rate is concerned the rate charged by bank-led BNPLs appears to be lower compared to such schemes offered by fintech players.

For instance, HDFC Bank charges Rs 70 as interest for a period of 30 days on a purchase of Rs 3,000. If you calculate the annual interest rate it is 28%. Whereas the maximum interest of many fintech players is around 2.5% a month which is 30% per annum. For example, Lazypay has a maximum interest rate of 28% while CASHe and Kissht have maximum interest rate of 30% for their longer period retail loans.

What about interest rate charged on credit card purchases? It is not a secret that credit card interest rates are among the highest of any type of loans, be it secured or unsecured. The revolving credit on a credit card is often 3% to 3.5% monthly which comes out to be 36-42% annually. However, there may be some high-risk borrowers where BNPL lenders may also charge similarly high rate of interest.

Also Read: Watch out for these costs in Buy Now, Pay Later schemes

Difference in eligibility criterion
Not everyone applying for a credit card will get one as card companies and banks decline many applicants who don’t meet their strict eligibility criterion. However, most of these consumers can get the BNPL option quite easily.

"Today, BNPL has become a convenient payment option among young consumers who may not have access to credit cards or are looking for a better payment experience. Consumers can create a BNPL account instantly without much hassle whereas credit card application is a tedious process," says Anup Agrawal, Business Head, LazyPay, a BNPL lender.

There are many consumer segments such as self-employed and lower income that are not preferred by credit card providers, and these are the consumers that many BNPL lenders reach out to.

However, do keep in mind that the bank-led BNPL option is not freely available to all applicants. For instance, only pre-approved current account and savings account customers of HDFC Bank are eligible for its FlexiPay facility. PayLater by ICICI Bank is available to a set of customers on an invite- only basis. The customers for which the facility is available will receive the invite pop-up when they log into Pockets wallet, iMobile or Internet Banking.

Credit card offers higher credit than BNPL
For BNPL, the overall shopping usage on these platforms is restricted to an aggregate of Rs 60,000 in a year as the amount of loan sanctioned using the OTP-based KYC cannot exceed Rs 60,000 in a year without completing the full KYC according to RBI rules. If your requirement is bigger, then you may either must go for full KYC or look for other modes of funding.

“It is advisable to opt for personal loans if the borrower need a loan for higher amounts, BNPL is a preferred product if you are looking to finance small-ticket items while shopping online,” says Yogi Sadana, CEO, CASHe, an instant lending fintech player. Though some of the BNPL players offer higher limit typically in the form of a personal loan, however, not all BNPL borrowers will be eligible for higher personal loan limit.

When it comes to credit card, if you have a pre-approved higher limit then you can always go for bigger purchases and expenses. Credit cards also offer the facility to swipe above the credit limit though it comes at higher cost and can have adverse impact on credit score. Click here to know more

Both offer good bargain in their specific segments
While a credit card works universally, however, each credit card may not be able to strike a deal with all merchants at all times. Based on your shopping preferences you may prefer a particular merchant for the bulk of your budget. So, there is a high chance that the BNPL option of the merchant you are shopping with may offer better bargain than what your credit card may offer.

However, sometimes the reverse may happen. If a credit card provider is offering a cashback on certain products on a particular platform, then you will be better off by using your credit card as it will not only give the usual credit free period but it will also reward you with the additional cashback.

BNPL offers instant and easier access than a credit card
At the time of making online purchases, filling up your credit card details and going through the multiple levels of authentication often requires a lot of effort. This is where BNPL scores in terms of ease of access as you are ready with one authentication step or with one virtual UPI ID followed by one time authentication.

Another area where the credit card loses points is the application stage -- once you apply for your credit card it may take anywhere between 2-3 weeks for you to finally get the card. However, the status of approval for BNPL credit line is known almost instantaneously. “The BNPL offering from CASHe helps a borrower to make purchases for as little as Rs 1,000 with zero cost EMIs. Also, for BNPL, the account can be created quickly, and money can be accessed within minutes,” says Sadana.

“There are some use cases where customer uses our BNPL service even when credit is available – these come down to ease of use, transaction speed and the fact that BNPL offering (within grace period) is free," says Krishnan Vishwanathan, CEO & Founder, Kissht an instant lending fintech player.

Credit card has better universal acceptance than BNPL
Most of the e-commerce platforms and other merchants are also trying to promote their inhouse or partner’s BNPL option. Flipkart offers the pay later payment option through its financial arm Flipkart Advanz Services. Amazon Pay EMI has been re-branded to Amazon Pay Later. Amazon offers this facility through its lending partners like Capital Float or IDFC FIRST Bank. So, if you get the BNPL facility of one such lender then it may remain more specific to that platform.

And since the market is so fragmented with everyone wanting to get into the lending business, depending upon the preference and interest, merchants generally onboard only a select set of BNPL fintech players. This is why only few BNPL will have synchronised visibility at the payment window of the merchant. Unless it is a UPI-based BNPL funding it is difficult for all BNPL fintech lenders to have wider acceptability.

Credit cards, on the other hand, work on all platforms and have biggest reach when it comes to payment acceptance.

What you should do?
It is always better to compare the total cost of finance before going zeroing in on a lender. If you have a credit card then you automatically have the credit free period so your decision on whether to go for BNPL or not, will depend upon the attractiveness of the deal – the charges, interest rates and so on. So, whoever offers the better deal you can go with them. If it comes to purchase on EMI of longer duration, then there are chances that your credit card may offer better rate than BNPL which you can always check and decide.