BNPL vs Credit card - What are the differences?

Apr 05, 2024

Shoppers often dream of a genie that helps them buy their favorite things without charging their credit or debit card.

The newest genie in town is ‘buy now pay later’ (BNPL).

According to research, over 60% of consumers have used this method to buy goods and services online.

While BNPL is more or less like a credit card that lends us credit for purchases, BNPL doesn’t force its users to pay the used credit at the end of the month.

Due to their easy signups and convenient usage, customers show a preference to buy now pay later than other methods of payment.

What is buy now, pay later?

Buy now pay later is a financial program that lends credit to purchase things online which can be returned in installments within a short interest-free period.

So, without spending out of their pocket or swiping their credit/debit cards, the customer can make the payment. Focused on demographics that are frequently short on money, BNPL also grants its users frequent cash backs and offers.

From shopping online to making utility payments, one can rely on buy now pay later for short-term financial requirements. The payment and installment schedules of BNPL vary per retailer and per card provider.

How does the BNPL model work?

Buy now pay later service providers collaborate with retailers like Amazon, Flipkart, etc, and offer their payment mode as an option at the end of the checkout process.

Customers can create their accounts with BNPL and finish their payment. The BNPL provider pays on the customer’s behalf and levies the customer on installment.

If all the dues are paid on time, there won’t be additional charges. For every missed or delayed payment, there will be an additional charge.

Certain pay later providers request the customer to make a small down payment, which is a part of the overall price of the product.

Pros of opting for BNPL cards

1. Easy signup

Users don’t have to fill out long forms to signup for buy now pay later schemes. The signup process won’t even take 2 minutes as all it requires is your contact information and documents pertaining to the bank account.

As the eligibility requirements are relaxed, anyone can easily meet them and get approved within a day or even instantly.

Additionally, buy now pay later can be very resourceful to make emergency purchases for customers who cannot have credit cards or don’t want to have credit cards.

2. Promotes credit score

Having no credit score can affect your prospect of getting financial assistance from lending institutions in the future.

You will need this score as an assurance to prove that you have a good payment history. While obtaining a credit card can be an uphill battle here, BNPL cards will have your back.

You can use buy now pay later solutions to pay your monthly bills and repay them on time to build a good credit history.

3. Able to choose installments that suit your budget

You do not have to pay a hefty bill at the end of your billing period.

Instead, you can take up one-time or EMI payments that would let you take advantage of stretched-out repayment schedules.

You can calculate your financial potential and choose how you want to repay. This privilege is not available with credit cards or any other lending systems.

4. Don’t let a hard inquiry credit check affect your credit score

BNPL providers don’t usually go for a full-on credit history check before approving an application.

They don’t request your full credit history with your entire repayment data from the bureau which can impact your credit and reduces it even more.

Cons of opting for BNPL cards

1. Buying disposition goes for a toss

Since the amount is not going to be paid anywhere around, buyers feel the urge to invest in things they don’t even need. Though it’s beneficial to merchants, buyers fear going broke as BNPL is always just a purchase away.

2. It isn’t always interest-free

Interest-free lending is fine. But if the customer isn’t able to pay due to some reasons, the interest amasses within a short period and it’s higher than the credit card interest rate. If two or more dues go missing, the overall amount to bear is a lot higher than the actual price.

3. Cannot use with every vendor

The concept of BNPL is still new for many shops and vendors. Hence they take time to understand how it works.

For this reason, you won’t be able to use this with every vendor, or it can take time for that to be accepted universally.

4. Missed payments can bring your score down

Missed payments cost you a lot of money and whack your credit score too. It takes immense effort to build the score to a positive level which can be blown out in a few days.

Pros of credit cards

1. Convenience

Credit cards are one of the most convenient and widely accepted payment methods. Credit cards allow for quick and easy transactions both offline and online and also eliminates the need to carry cash.

2. Builds credit history

Responsible usage of credit cards can help individuals to build a positive credit history. Timely payments and low credit utilization can help in improving credit scores, which can be helpful when applying for business loans or mortgages in the future.

3. Rewards and benefits

Most of the credit cards come with reward programs that offer cashbacks, points, discounts or even airline miles for eligible purchases. These rewards can be later redeemed for various purposes.

Cons of credit cards

1. Debt accumulation

Debt accumulation is one of the major drawbacks of credit card usage. Debt accumulation arises when a business spends more on their credit cards than the amount they can afford to repay in full each month. If not managed carefully, credit card debt can accumulate quickly and become a financial burden for your business.

2. Interest charges

Businesses are at the risk of paying a high interest if they don’t pay off their balance in full each month. Businesses have to be mindful of interest rates, fees, and ensure responsible usage to avoid financial pitfalls.

3. Chances of overspending

Possibility of overspending is one of the potential downsides of using credit cards. With the convenience credit cards offer, businesses tend to overspend and may end up building a pile of debit that becomes difficult to repay. 

How credit cards are different from BNPL?

We are already used to pay later credit cards and have been using them for a while. The major difference is, that you can use the credit card anywhere with any vendor whereas BNPL can be only used with the selected vendors they tie up with.

Other than this, main difference between credit cards and buy now pay later are as follows,

1. Repayment cycle

If it’s a credit card, you will have a monthly repayment cycle. The user will repay the used credit without interest if the payment is made within the billing cycle.

On contrary, BNPL has a stretched-out repayment period of several weeks and months. The customer will be informed ahead of time when the payment is due and they must pay it on time.

2. Interest rates

With pay later credit cards, you get the same, standard interest-free duration of one month to 45 days, including a quick grace period. Any due that’s paid beyond that will be levied an interest of 3 to 5%. Buy now pay later schemes have a whole different pattern here for levying interest.

They usually show an upfront repayment schedule and if it’s missed an interest of 10 to 20% will be charged along with a late payment fee. If the amount is paid in EMI that extends for a longer duration of 48 months and above comes with an interest rate.

Another prominent way the BNPL program differs from credit cards is, that they have a transparent pricing model, unlike credit cards where the bill might arrive with hidden charges.

3. Rewards

Credit cards offer potential discounts or bonus points for purchases with certain vendors or all payments. A majority of perks are offered for merchants who the credit card provider has tied up with.

BNPL offers cashback offers too for every transaction above a certain limit. Customers can significantly save a lot with large buy now pay later transactions.

4. Eligibility criteria

Eligibility criteria are almost the same for credit cards and pay later cards though the minimum requirements vary from one lending institution to another. Credit card plans have different cards and schemes to suit the buying potential of customers.

So, to prove the creditworthiness, the applicant for a credit card should produce salary slips and be a salaried employee or self-employed worker. There are certain credit cards that are not applicable for non-citizens of the country. The minimum age limit to obtain a credit card is 18 whilst it’s 20 for BNPL cards.

To use buy now pay later services, one must be a salaried employee who has an active bank account and must reside in tier 1 or tier 2 cities (within serviceability regions of the BNPL agent).

How does BNPL differ from bank loans?

Bank loan

● There is an interest charged for the total loan amount offered to the lender.

● The limits of the principal amount offered are high. Can go up to $50,000.

● Extended tenure. One can take up to 3 years to repay the loan and the amount is split based on that.

● Long documentation process and waiting time to get the loan approved.

Buy now pay later solutions

● No interest is charged for the principal amount offered unless the dues aren’t paid on time.

● Maximum offered credit is lower than bank loans and in some cases, credit cards too. 

● Short tenure. Should be paid within 6 months to 1 year.

● Can quickly sign up on the app or website within a few minutes and get approved instantly.

Corporate cards with a credit line or BNPL for your small business expense?

When all is said and done, both BNPL and credit cards are great for personal shopping stunts. But how beneficial they can be for business purchases and how business users can utilize pay later credit cards?

BNPL cards are a perfect short-term financing source in general. But their main limitation when it comes to business is the loan amount limit.

In businesses, the purchasing budget and limits are usually higher than in personal shopping. Though buy now pay later is suitable for small and medium-sized businesses, it cannot be relied on for more than a few purchases due to the higher interest rates.

Compared to BNPL cards, corporate cards with credit are much more suitable for business expenses. You can enjoy substantial cashback and offers given the high amount involved in transactions. And it’s easier to monitor and verify the expenses from a single place as you get monthly bills from your provider.

While this can entice any SMB, what they overlook is the availability of high-end banking solutions from modern fintech institutions that they can prefer instead. These solutions work exactly like pay later credit cards and you can enjoy other features that are curated for businesses to make accounting easier.

One such solution is Volopay. The expense management system of Volopay has physical and virtual credit cards that you can use at your disposal.

The interesting part is that you can create unlimited virtual cards here and assign each one to your departments or any expense categories. You can load the money into your wallet and create budgets for every expense category/department. Or you can request for no collateral credit which can be approved and added quickly to your Volopay account. Each card can be tagged to a budget and can be set a spending limit.

Your finance team can supervise budget utilization and spending from the admin platform. You can make both local and foreign transactions (at nominal FX costs) with the card details of the respective expense line.

Get a flexible line of credit for managing business expenses