BNPL Risks: Experts Warn of Hidden Costs and Credit Score Damage

Buy Now, Pay Later (BNPL) services, popular for their convenience and zero-interest offers, are increasingly being scrutinized for potential financial pitfalls. Abhishek Kumar, a Sebi-registered investment adviser and founder of Sahaj Money, warns that the ease of these services can mask significant dangers. He illustrates this with a case where a user borrowed Rs 85,000 across five BNPL platforms for Diwali. What started as manageable installments with zero interest quickly escalated when a missed EMI led to a late fee soaring from Rs 500 to Rs 2,300 and severely impacted the user's credit score.

Kumar emphasizes that 'zero interest' periods are temporary, after which standard interest charges apply, often catching users unaware. Beyond interest, many BNPL platforms impose processing fees, convenience charges, and penalties for delayed or failed payments that accumulate rapidly. Crucially, BNPL transactions are reported to credit bureaus, meaning missed payments can significantly lower a credit score, affecting future borrowing capacity. Auto-debit failures due to insufficient funds can also trigger these penalties and credit score damage. Experts advise treating BNPL limits as debt capacity, not spending targets, and using them only for planned essential purchases, avoiding impulse buys or using them to bridge salary gaps.

Impact: This news highlights critical consumer financial risks associated with the rapidly growing BNPL sector. For investors, it signals potential regulatory scrutiny, challenges for BNPL providers in managing defaults, and a need for caution in fintech investments. It can also affect consumer spending patterns if awareness of these risks increases. Rating: 6/10.

Difficult terms explained: BNPL: Buy Now, Pay Later. A service allowing consumers to purchase goods and pay for them over time, often in installments. Sebi-registered investment adviser: An individual or entity registered with the Securities and Exchange Board of India to provide investment advice. EMI: Equated Monthly Installment. A fixed amount paid by a borrower to a lender at a specified date each calendar month. Credit score: A number that represents a person's creditworthiness, based on their credit history. Auto-debit: An automatic withdrawal of funds from a bank account on a specified date for a bill payment or loan installment.