BNPL & The Credit Score

BNPL or buy now pay later is the newest addition to the loan lender list in the Indian market. What makes them unique and popular is their quick dispersal loan feature. Unlike conventional loan providers, almost every BNPL lender does not require paperwork or background verification of the borrower. The BNPL app is most popular among youngsters for their shopping needs as it allows them to live a luxurious lifestyle with feasible instalment options.

 

But how does it work?

Well, the working mechanics of the pay later app is extremely simple. All that a user needs to do is download the application and then register. Once the registration is complete, they can apply for the loan by completing the mandatory application process. Applicants can also check the amount they are eligible for and the instalment options.

The loan is usually dispersed immediately post verification and approval. You can also opt for the BNPL payment option at the time of purchase through associated merchandise.

 

What about the credit score?

 A user’s credit account information such as payment history, credit limit or remaining balance of their loan and credit card is normally reported to the credit bureaus by their lender. This information primarily calculates the credit score.

On average, the transaction via BNPL is not reported to the credit bureaus but in case of a payment default, the BNPL may choose to share this information. If reported, it will hamper the credit score.

 

The curious case of missed payment

Since minimal paperwork or collateral is associated with pay-later loans, the agreement between BNPL lender and borrower mostly works on trust. The lender expects timely payment of instalments as agreed by the borrower.

But in case of a missing payment, the loan provider may calculate a late fee. In case of recurring missed payments, the borrower's account can be sent to collections. When reported to the debt collector, the history of the payment can be reported to the credit bureaus as well. The longer the tenure of missing payment the greater the damage to the credit score.

 

 A word of wisdom

BNPL is new to the market but has become a trending choice. However, several financial advisors suggest using buy now pay later as an emergency option rather than a go-to solution to support the dream of a luxurious lifestyle.

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