When you need to make a purchase or payment, but don’t have the cash in hand to do it, there are several financing options available. The more common ones are credit cards and personal loans. But more recently, a financing model has emerged, known as Buy Now, Pay Later (BNPL).
While BNPL is not entirely new, the rising popularity of e-commerce, coupled with a sense of wariness from the young consumers towards traditional credit, has enabled it to gain traction as an alternative loan facility.
The BNPL programme is essentially a payment scheme where payments for a certain service or product are broken down into more manageable instalments made over a short period of time. It is most commonly used for expensive retail goods, such as electrical appliances, gadgets, branded clothing and furniture.
Apart from having short-term instalments, BNPL is also interest free. The scope of its application has widened considerably. Today, you’ll find that instead of coming exclusively from businesses and retailers, there are now BNPL platforms available, often in the form of apps. BNPL is interest free only because the merchant that you are purchasing the goods from is paying a small fee to cover your interest. It works the same way as how credit cards can offer miles and cashback to consumers. They can only do so because a fee is charged to the merchant and some savings are passed on to the consumer.
In Singapore, some well-known BNPL service providers include Atome, Grab PayLater and ShopBack. The mechanism of payment involves scanning a QR code from participating merchants, and paying a small down payment first, usually about 10% to 25% of the purchase price. The remainder is then converted into monthly instalments that are to be repaid within a stipulated time frame.
Some credit cards also feature BNPL options for select merchants, although this is less common compared to apps. A study has found that up to 19% of Singaporeans aged 16 and above have used BNPL apps, with this number expected to rise. However, just like any other credit based purchasing concept, it comes with its own set of pros and cons.
The chief benefit of adopting the BNPL payment method is that there are no interests incurred. You only need to pay a small portion of the purchase price as a down payment, with the rest to be repaid in instalments during the coming months.
In addition to this, it allows buyers to make purchases of items they need immediately, without having to wait until they’ve saved up enough cash to spend. It is a convenient way to pay for goods and services that are urgently needed, without the burden of additional interest costs that comes with loans.
Furthermore, by easing the strain on immediate cash reserves in lieu of deferred payments, it promotes better cash flow management. Many BNPL apps also offer additional perks for users who make purchases using this system. This includes having cashback promotions, discounts and processing fee waivers.
The BNPL system may be a convenient way to pay for purchases, but it can be a challenge to manage for those with multiple debts. BNPL schemes take place on a separate platform and therefore have to be tracked separately.
This can result in payments being overlooked, and left unpaid. Missed payments can result in late payment fees, and these fees can pile up, increasing the financial burden of repaying the loan. Besides having to contend with late payment fees, your unpaid instalments can snowball and accumulate should you fail to settle your monthly instalments on time. These BNPL debts will also factor into your credit score, affecting it negatively.
Another obvious drawback of BNPL is that it can only be used for accepting merchants which means that if a merchant does not work with a BNPL provider, you will not be able to use such a service.
Personal loans provide versatility and flexibility. Borrowers have complete control over their use and management. Most personal loans are unsecured, and can reach a quantum of two to eight times your monthly income. Here’s how BNPL schemes compare to personal loan as a form of financing.
Unlike BNPL programmes, personal loans incur interest rates. Generally, these range from about 3% to 8% p.a., but can go up to 48% p.a. in some cases for moneylenders. Therefore BNPL is generally the cheaper option.
However although BNPL schemes don’t charge interest, they do charge late payment fees like personal loans which can accrue for every payment cycle that you miss.
Personal loans offer higher quantums than BNPL programmes. When it comes to BNPL, you can only use them to pay for specific items or services and is limited to a quantum of S$2,000 per provider if no additional credit assessment is mandated. A personal loan, on the other hand, would offer a higher quantum that would be credited directly into your bank account. This way, you can make the payments you need, while only having to repay one loan.
A personal loan is also suitable for circumstances whereby you cannot use BNPL to offset your cash flow problems, such as a medical emergency, vehicle repairs, natural disasters, or home upgrades.
As the quantum for BNPL schemes tend to be lower than personal loans, their repayment periods also tend to be shorter. Whilst personal loans can be settled over a period of several years, BNPL repayments generally take 3-6 months to complete, with instalments scheduled on a monthly or bi-weekly basis.
The question thus stands, is BNPL better than a personal loan? Well that depends. We recommend it for instances where purchases are small and you don’t need many items or services at once. For situations involving multiple purchases and larger costs, a personal loan would be more suitable.
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