Understanding the Contenders
A personal loan is a lump sum of money borrowed from a bank or NBFC, which you repay in fixed monthly instalments (EMIs) over a set period, typically 6 months to 5 years. The interest rate is decided upfront. Buy Now, Pay Later, on the other hand, is a short-term
financing option offered at the point of sale, allowing you to buy something immediately and pay for it later, often in interest-free instalments over a few weeks or months.
The Interest Rate Illusion
On the surface, BNPL often looks cheaper because of its 'no-cost EMI' offers. This is true if you pay back the entire amount within the short, interest-free window (usually 15-30 days). However, if you miss a payment, you can be hit with high late fees and interest charges, sometimes applied retroactively from the date of purchase. Personal loans have a clear interest rate from the start, typically ranging from 11% to 24%. While this seems higher, it's predictable. You know the exact cost of borrowing before you commit, making it easier to budget for.
Beware of Hidden Charges
The 'total cost of credit' goes beyond just the interest rate. Personal loans often come with a one-time processing fee, usually 1-3% of the loan amount, which is deducted upfront. With BNPL, the danger lies in penalty charges. Late fees for missed payments can be steep, quickly erasing the benefit of the initial interest-free period. Some BNPL services may also have hidden processing fees for certain transactions. These seemingly small charges can accumulate, especially if you are using multiple BNPL services at once.
Ticket Size and Tenure
Your choice should also depend on the size of your purchase. BNPL is designed for smaller, everyday transactions, typically ranging from ₹1,000 to ₹50,000. The repayment tenure is short and rigid. Personal loans are better suited for large-ticket purchases like home renovations, appliances, or funding a major event, with loan amounts starting from around ₹50,000 and going up into lakhs. They offer much longer and more flexible repayment tenures, allowing you to spread the cost over several years.
Impact on Your Credit Score
Both financing options can impact your CIBIL score. A personal loan, with its structured monthly repayments, is a great way to build a positive credit history if you pay your EMIs on time. BNPL was initially considered 'casual credit', but this has changed. Many BNPL providers now report your repayment behaviour to credit bureaus. This means a single missed BNPL payment can lower your credit score, potentially affecting your ability to get larger loans in the future. Conversely, timely BNPL repayments can help build a credit footprint.
So, Which One Should You Choose?
There's no single right answer. Your choice depends entirely on your needs. Use BNPL for: Small, manageable purchases you are confident you can repay in full within the short interest-free window. It's great for convenience and managing cash flow for minor festive expenses. Choose a Personal Loan for: Large, planned purchases where you need a significant amount of cash upfront and require a longer, structured period to repay. It offers predictability in costs and helps in building a solid credit history. The key is to see BNPL not as free money, but as a short-term loan that demands discipline.
