Before opting for such a scheme, keep in mind that you must be able to make the repayments of the BNPL offer on time. Or, like any other default, it can have negative consequences, meaning that a default can impact your credit score.
Why it’s more important for young people and new borrowers
The credit score gives an indication of the discipline a borrower has shown in repaying his loans. Most traditional lenders like banks and non-bank finance companies (NBFCs) rely on credit score data before approving a conventional loan or line of credit to a borrower. However, New Borrowers (NTCs) are potential borrowers who have never taken out a loan or any other line of credit, and therefore have no credit history that a lender can assess. Thus, for these borrowers, the propensity to avail themselves of a credit option like BNPL remains higher and this is the reason why they constitute the preferred segment of BNPL lenders.
Most of them are either young consumers or people who do not have a formal line of credit like credit cards or EMI cards to make payments. This is the reason why this group is most vulnerable to the negative impact of default on any new credit due to their ignorance of credit and the consequences of default. So, if you belong to this group, you need to make sure you don’t default on payments if you go for a BNPL system to make a purchase.
BNPL repayment is tracked and reported to the credit bureau
BNPL offers short-term credit via a no-credit credit period ranging from 15 days to 45 days, after which borrowers are required to pay the full amount owed. If you think this is a small loan and therefore any default will have no consequences, then you are wrong.
Pay attention to these costs in the Buy Now, Pay Later programs
For example, under the terms and conditions of ICICI Bank’s PayLater, “In the event that the total amount due is not paid by the payment due date, this will be interpreted as a default by the PayLater customer and he / it will become responsible for paying the amount as well as default interest and late fees, as indicated on the following month’s account statement. ”
As with any formal credit such as a loan or credit card, the repayment history of all borrowers using BNPL is reported to the credit bureaus. “BNPLs which are offered in partnership with banks and NBFCs. are reported to credit bureaus and repayment behavior of the same impact bureau score, ”said Anurag Sinha, co-founder and CEO of OneScore, a credit score management platform. So, any complacency in terms of default can stick to your credit history, which not only lowers your credit score, but could dramatically increase the cost of future credit, and in the worst-case scenario, could also prevent you access credit in the future.
Factors that may prevent you from accessing the BNPL facility
BNPL players who lend to NTC borrowers are not very dependent on credit rating as lenders perform credit scoring using alternative tools. The most basic information a BNPL lender relies on is the customer’s past buying behavior from the merchant, if applicable.
“BNPL players join forces with major e-commerce players in order to access basic but essential information on the customer, such as the history of their purchases, their payment behavior, etc. Says Vishal Maru, Senior Vice President of Merchant Payment Services, Loyalty and Digital Payments, Worldline India
This data is not only used to approve the credit but also to decide the amount of credit given to the borrower. “LazyPay uses analytics to understand a consumer’s background and gain insight into their purchasing behavior to determine their spending limit. This process is independent of a person’s credit rating and is therefore more inclusive for new credit consumers, ”says Anup Agrawal, Business Chef, LazyPay, a BNPL lender.
It can also include your income profile and payment behavior. “Some of the most widely used approaches are income-based valuation, valuation based on bank statements. Some lenders also use alternative data such as telecommunications, vehicle ownership, etc. to assess NTC customers. “, explains Sinha.
Take your fingerprints and social media seriously
In the age of smartphones and the low cost of the Internet, the use of online social media and other digital platforms has steadily increased. This increases the digital footprints that can be traced by others. Many lenders have developed tools to analyze these digital fingerprints and predict the user’s creditworthiness.
CASHe’s proprietary credit scoring framework, the Social Loan Quotient (SLQ), uses a combination of big data analytics and proprietary AI-based algorithms to assess traditional inputs and digital footprint. of the user in order to measure his solvency. SLQ is both dynamic and forward-looking by design because it measures a borrower’s propensity to default based on their current behavioral information, ”said Yogi Sadana, CEO of CASHe, a fintech instant lending player.
So what kind of digital data do these lenders look at when they assess borrower creditworthiness? “These include the customer’s digital footprint, identity triangulation through multiple sources (Aadhaar, NSDL, office, bank profile, etc.), review of bank debits and credits, past purchase history and other data points such as utility bill payments etc. customer creditworthiness as well as a powerful back-end fraud prevention engine, ”Krishnan Vishwanathan, CEO and Founder of Kissht, an instant lending fintech player.
Along with many other factors, your social media activity is also taken into account when assessing your creditworthiness. “It is tied to a number of data points that include both online and offline borrower data, such as their mobile and social media footprint, education, compensation, career, and financial history. The scores are generated in real time, which allows the client to know, in a few seconds, whether he qualifies for a loan with CASHe or not, ”explains Sadana.
Smaller credit limit for NTC borrowers: Although a BNPL lender is liberal in providing credit to new borrowers, the amount of credit is still lower initially. “Based on these basic background checks, customers are offered a line of credit option for a small note to begin with, eligibility increases over time,” says Maru.
Borrowers with low credit scores have access to BNPL but at a higher cost
While many traditional lenders may reject borrowers who have a low credit rating, the chances of these borrowers obtaining credit through BNPL are higher because BNPL players are dependent on their internal rating in addition to the credit rating.
“Given the segment we are targeting (low income and self-employed), these households are often subject to income disruptions that result in a poor credit profile. These borrowers are not inherently risky and a lender should offer a flexible product from a repayment perspective to ensure it is of maximum relevance. If the product is built the right way, these customers find it easy to manage their refunds, ”says Vishwanathan.
However, the interest rate that is charged to these borrowers is higher. “Risk is inherent in the business and we understand that credit losses will occur. Pricing ensures that these risks are built in to ensure the business can still generate profit, ”said Vishwanathan.