After seeing her credit score drop, Mumbai-based Hinal Shah decided to check her credit report to ascertain the cause. Little did she know that she was in for a big shock. “I saw two active loans from Capital Float and Karur Vysya Bank (KVB) worth ₹1,500 and ₹6,500, respectively, in my name. I was horrified as I’ve never borrowed from these financial institutions. In fact, currently, I don’t have any active creditexcept my credit card," said the 23-year-old who works as a consultant with a cosmetics brand.
When Shah pursued the matter, she found that she is registered at a buy now, pay later (BNPL) platform that has extended her a credit line from its lending partner Capital Float (KVB is a co-lender with Capital Float).
“I once tried one or two signing-up steps with Amazon Pay Later but never linked my account to the service. I think that the credit limit gets activated even if you fill in a few details or get yourself registered but don’t use the service," she said.
Shah’s is not a standalone case. Recently, many users of BNPL services took to social media to report similar incidents where such platforms have taken loans on their behalf from banks or non-banking financial companies (NBFCs). These users also complained that the loan was taken without their consent. However, that’s not completely true.
Is it a loan or not?
A BNPL platform, such as Ola Postpaid, ZestMoney, Simpl, 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 BNPL platform’s NBFC or banking partner. Some platforms, such as Simpl and LazyPay, don’t process loans through formal lending channels.
The credit offered at the checkout is not approved instantly and instead is drawn from a pre-approved credit line that the consumer is assigned when she signs up with a BNPL platform. Industry experts say consumers often confuse BNPL offering as a convenient payment method and don’t realize that they are, by signing up for any pay later service, giving their consent to the partner bank or NBFC to release a credit limit for them— akin to what happens when you get a credit card.
“BNPL is essentially credit at the end of the day and must not be treated any differently than other types of loans," said Lizzie Chapman, CEO and co-founder, ZestMoney.
For consumers, the confusion could arise from the fact that they sign-up for a ‘credit line’ and not a ‘loan’ in a BNPL service. “A credit line is essentially a limit which the consumers may or may not use, but is categorized in the books as a loan in their names," said Nitin Gupta, founder and CEO, Uni. This is the reason credit reports of Shah and that of many others like her show outstanding loans.
If a consumer utilizes the credit line for purchases, she has to pay back the amount drawn from the limit within the interest-free window. Different platforms have different bill cycles and late fee structures. The bill cycle typically ranges between 15 and 30 days, while some platforms divide the borrowed amount in equal installments over 3-4 months. Defaulting on any due date attracts late fees and some platforms also charge interest in addition to the last fee (see ‘under the BNPL hood’ in graphic).
If the credit line is not utilized, the consumer doesn’t have to pay anything.
Impact on credit score
Missing a payment in a BNPL loan is reported as a delinquency to the credit bureaus, just like any other loan. Even if some platforms allow you to pay a minimum balance while the rest of the amount is carried forward, it can still hurt your Cibil score. “Delaying a loan payment even by a day is reported to the credit bureaus by banks and NBFCs," said Saurabh Kapil, CEO, Credit Help India.
But, can an unutilized credit line also lower down your credit score? “It’s a possibility because when you enquire for a credit line and it gets sanctioned, you are supposed to use it, and not doing so may hamper the Cibil score. But, it’s worth noting that credit bureaus have algorithms that consider around 34 parameters to arrive at credit scores. No one parameter, unless it’s a loan default, can have a major impact on the score," said Kapil. “Sometimes signing up for or even enquiring at multiple BNPL services cuts down your score."
A credit line, if unutilized, doesn’t lapse and you will have to deactivate your pay later account to close the ‘loan’ showing up on your credit report. Consumers cannot terminate pay later service if they have outstanding dues.
