After noticing a drop in his credit score, Hinal Shah from Mumbai decided to check his credit report to find out the reason. Little did he know that he was in a great shock. “I have seen two active loans from Capital Float and Karur Vysya Bank (KVB) 1,500 more 6,500, respectively, in my name. I was intimidated because I never borrowed from these financial institutions. In fact, currently, I have my . have no active credits other than Credit CardSaid the 23-year-old, who works as a consultant with a cosmetics brand.
When Shah investigated the matter, he found that he was registered on a Buy now, pay later (BNPL) platform which has extended its credit line from its lending partner Capital Float (KVB is a co-lender with Capital Float).
“I once tried one or two sign-up steps with Amazon Pay Later, but never linked my account to the service. I think the credit limit gets activated even if you fill in some details or get yourself registered but don’t use the service,” she said.
Shah’s case is not alone. Recently, several users of BNPL services took to social media to report similar incidents where such platforms have taken loans from banks or non-banking financial companies (NBFCs) on their behalf. These users also complained that loans were taken without their consent. However, this is not entirely true.
Debt or not?
A BNPL platform, such as Ola Postpaid, ZestMoney, Simple, Amazon Pay Later, Uni, Paytm Postpaid, etc., offers zero interest credit at payment check out points of online shopping platforms. The credit is facilitated by the NBFC or banking partner of the BNPL platform. Some platforms, such as Simple and LazyPay, do not process loans through formal lending channels.
Credit given at checkout is not approved immediately and is instead taken from a pre-approved credit line that is assigned to the consumer upon signing up with the BNPL platform. Industry experts say that consumers often confuse BNPL’s offering as a convenient payment method and do not realize that by signing up for any later payment service, partner banks or NBFCs have to pay for them. Giving your consent to the issuance of a credit limit – like what happens when you get a credit card.
“BNPL is essentially credit at the end of the day and should not be treated as different from other types of loans,” said Lizzie Chapman, CEO and co-founder of ZestMoney.
For consumers, confusion may arise from the fact that they sign-up for a ‘line of credit’ and not for a ‘loan’ in the BNPL service. Nitin Gupta, founder and CEO of Uni said, “A credit line is essentially a limit that consumers may or may not use, but are classified as a loan in their name in the books.” This is the reason Shah and many others like him showed outstanding loans.
If a consumer uses a credit line for purchases, he/she will have to pay the amount withdrawn from the limit within an interest-free window. Different platforms have different bill cycles and late fee structures. The billing cycle is generally between 15 to 30 days, while some platforms split the borrowed amount into equal installments over 3-4 months. Defaults on any due date incur a late fee and some platforms charge interest in addition to the closing fee (see ‘BNPL under the hood’ in the graphic).
If the credit line is not used, the consumer does not have to pay anything.
impact on credit score
A BNPL loan default is reported as a crime to the credit bureaus just like any other loan. Even though some platforms allow you to pay a minimum balance amount while the balance is carried forward, it can still hurt your CIBIL score. CreditHelp India CEO Saurabh Kapil said, “Delays in loan payments even for a day are reported by banks and NBFCs to the credit bureaus.”
But, can an unused credit line also lower your credit score? “This is a possibility because when you inquire about a credit line and it is approved, you must use it, and not doing so may hamper the CIBIL score. But, it is worth noting That credit bureaus have algorithms that consider around 34 parameters to arrive at a credit score. Any one parameter, unless it is a loan default, can have a big impact on the score,” Kapil said. “Sometimes signing up or inquiring into multiple BNPL services lowers your score.”
A credit line, if used, does not expire and you must deactivate your after-payments account to close the ‘loan’ that appears on your credit report. Consumers cannot terminate the Pay Later service in case of outstanding balance.
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