There is a glut of unsecured loans in the markets. Alongside banks and non-banking companies, there are lending start-ups and fintech companies offering easy access to liquidity to anyone who needs it. I am sure you have received many calls and text messages about loan offers. The pandemic has caused liquidity problems for many. People have suffered income uncertainty and need help with their finances.

Some years back, we just had personal loans and credit cards as unsecured credit products. Now we also have Buy Now Pay Later (BNPL) loans. All these options are available to the right borrowers with just a few taps on their phone screens. Fill out your personal details, complete your KYC process and
get your loans sanctioned – sometimes in minutes.

Thanks to changes in lending regulations, the KYC process can now be done from your home via a video call. Gone are the days when you had to queue up in a bank, submit your photocopied documents and then wait for days to get your loan. The RBI is to be congratulated for these progressive regulations, which have not only empowered consumers but also encouraged tremendous innovation in fintech – a domain in which India is a world leader today.

The young are rapidly turning to these digital loan options. As per a Bernstein report from April 2021, the gross merchandise value of India’s BNPL market was valued at $15 billion. This is expected to grow over sixfold to $100 billion by 2025.

With BNPL being a new lending category, its regulations are still being shaped to protect customers. There were concerns around this category that needed to be addressed. The RBI wanted greater transparency over loan charges. It also wanted all BNPL lending to be reported to credit bureaus for the computation of credit scores.

In August 2022, the RBI stepped in to announce new digital lending guidelines. Now, digital lenders will need to provide a one-page fact sheet mentioning all loan costs. They will also have to report consumer data to the bureaus. Unsecured loans, as I said earlier, attract a higher rate of interest than secured loans, such as home loans. Given how easily they are available, how are they good for your
finances? Credit cards, electronic store credit and now BNPLs will increasingly become the first form of credit young people take. Your first loan of any kind initiates your credit history. I would also throw education loans into this mix, though they are less comparable to the other options.

These forms of credit help you fulfil an immediate need, such as paying for a cab ride or buying an electronic item. For an eligible borrower, they are easy to get and easy to repay, and easy to avail again. Your credit card transactions may also provide you incentives, such as reward points, discounts and deals. This is better than spending via cash, which has no incentive.

India has seen an interesting development with no-cost EMIs as a built-in feature on credit cards. With these, you can buy electronics with a no-interest loan that can be paid off in six to 12 months. For example, with BankBazaar’s co-brand credit cards, you have no-cost EMIs on Amazon with access to offers delivered to customers on the first of every month for laptops, TVs and household appliances. Most importantly, these forms of unsecured credit also help you develop a credit history, which becomes pivotal to your financial life and forms an important component in your 5S Pyramid.

Your credit history is a snapshot of your financial health. No matter what you earn, how much money you have in your bank and where you live, your credit history sticks to you. If you pay your loans on time, it will reflect positively on your credit history. If you are late, have loan defaults and have not been able to fully repay your dues, your credit history becomes toxic. As a nation, we are still coming around to the concept of credit score. We have much to learn about the long-term repercussions of our credit behaviour.

As per BankBazaar’s 2021 Aspiration Index survey, 27 per cent of the respondents did not know that their credit scores impact their loan interest rates. We will come to what a credit score is shortly. But as of now, you should know that it dictates whether you will be able to borrow, how much and at what cost. Therefore, while unsecured credit is easily available, it is critical to use it in a disciplined manner, else it could hurt your credit score and jolt the 5S Pyramid.

We will talk in depth about what credit history is, how it is scored and how it impacts you. We will also look at why you need to reach Serenity, the summit of our 5S Pyramid, with a credit score over 800.

BNPL loans are a fast-growing loan segment. They are being sold by fintech lenders, large non-banking lenders, e-commerce players and even some banks. BNPLs have been around for some years now. Ride-sharing and food delivery apps as well as several e-commerce platforms have had them as payment options. These loans typically range from a few thousand rupees to a lakh. With the pandemic, the demand for BNPLs shot up.

The period saw a change in the way people make transactions.
It happened because of two fundamental reasons.

  • Job losses and pay-cuts due to the ensuing lockdowns made it difficult for many people to spend money freely.
  • An increasing number of people turned online even for their essential expenses, like groceries and utility bills, in addition to their discretionary purchases. Thanks to these factors, BNPLs proliferated.

The loan does what its name suggests. It allows you to buy something and pay for it later. The merchant, typically someone on an e-commerce platform, allows you to pay from options such as cash on delivery, debit or credit card, or a BNPL. If you choose to pay via a BNPL, the payment is done on your behalf by the BNPL loan provider, with whom you need to register your loan account.

If you use the BNPL option and later repay the loan provider in the interest-free window, you can avoid paying interest and penalties. You typically incur no charges for using this loan, not even processing fees. The loan allows you to delay your payments at no cost, provided you repay the dues on time. The loan provider makes his money by taking a cut from the merchant.

Consumers, especially Early Jobbers and Moneymooners, are looking for simplified microloans to manage their recurring and occasional purchases in a better manner. Lenders often prefer borrowers with a credit history when disbursing a home loan, car loan, or a personal loan. But often for BNPLs, lenders are open to borrowers who are new to credit. But remember, what has been borrowed also needs to be repaid. If you do not repay in a timely manner, your credit history will get wrecked.

Excerpted with permission from The Bee, the Beetle, and the Money Bug: The Bankbazaar Guide to the Financial Wild, Adhil Shetty and AR Hemant, Rupa Publications.