Personal Loan vs. Buy Now, Pay Later – Which One Costs You More?

Choosing between a personal loan and Buy Now, Pay Later (BNPL) can be confusing. A personal loan gives you a lot to repay over time, while BNPL lets you split small purchases into easy payments. Both have pros and cons – loans cost more in interest, but BNPL can be risky if you miss payments. Pick wisely based on your needs and budget. Let’s explore more in this blog!

What Is A Personal Loan?

​A personal loan is money you borrow from a bank or financial company. You receive the full amount at once and repay it in fixed monthly payments, called EMIs (Equated Monthly Installments), over a set period. Most personal loans are unsecured, meaning you do not need to provide any collateral like property or gold. They are often used for various purposes such as medical emergencies, weddings, home renovations, or consolidating other debts.

Example: Hari's Personal Loan

Hari is a 24-year-old software engineer living in Bengaluru. He wants to buy a new laptop for ₹60,000 but does not have enough savings. He decides to take a personal loan from a bank.

The bank offers him a loan of ₹60,000 at an annual interest rate of 12% for a tenure of 2 years (24 months). His monthly EMI is calculated using the standard formula for EMI calculation.

Here is a breakdown of Hari's loan:

Note: The EMI is calculated using the standard EMI formula: EMI = [P x R x (1+R)^N]/[(1+R)^N – 1], where P is the principal amount, R is the monthly interest rate, and N is the number of months.

Hari will pay ₹2,822 every month for 24 months. By the end of the loan term, he will have to pay a total of ₹67,728, which includes ₹7,728 as interest.

Before taking a personal loan, it is essential to assess your repayment capacity and understand the terms and conditions. Using online EMI calculators can help you plan better.

Pros and Cons of a Personal Loan

Personal loans offer a convenient way to access funds for various needs, but they come with both advantages and disadvantages. Here is a concise overview:​

Pros

• Flexible Use: Funds can be used for multiple purposes, such as medical expenses, home renovations, or consolidating debt.

   

• No Collateral Required: Most personal loans are unsecured, meaning you do not need to pledge assets like property or gold.

   

• Quick Access to Funds: Many lenders offer fast approval and disbursal, often within a few days.

   

• Fixed Interest Rates: Personal loans typically come with fixed interest rates, ensuring predictable monthly payments.​

   

• Credit Score Improvement: Timely repayments can positively impact your credit score by demonstrating responsible borrowing behavior.

Cons

• Higher Interest Rates: Compared to secured loans, personal loans often have higher interest rates, especially for borrowers with lower credit scores.

   

• Additional Fees: Lenders may charge processing or origination fees, which can increase the overall cost of the loan.

   

• Strict Eligibility Criteria: Approval may require a strong credit history and sufficient income, making it challenging for some applicants.

   

• Risk of Debt Accumulation: Borrowing more than necessary or failing to manage repayments can lead to a debt spiral.​

   

• Impact on Credit Score: Missing payments or defaulting on the loan can negatively affect your credit score.

Before opting for a personal loan, it is essential to assess your financial situation, understand the terms and conditions, and ensure that you can comfortably manage the repayments. Using online EMI calculators can help in planning your finances effectively.

What is BNPL (Buy Now, Pay Later)?

Buy Now, Pay Later (BNPL) is a payment method that allows you to purchase items immediately and pay for 

them over time in smaller, often interest-free installments. This option is commonly available during online shopping and is increasingly offered in physical stores as well. BNPL services are gaining popularity due to their convenience and flexibility.

Example: Sara's BNPL Purchase

Sara is a 22-year-old college student living in Bengaluru. She wants to buy a new smartphone priced at ₹24,000 but doesn't have the full amount upfront. While shopping online, she notices a BNPL option that allows her to pay in four equal monthly installments without any interest. This plan suits her budget, so she decides to proceed with the BNPL option.

Here is how Sara's payment plan looks:

Sara pays ₹6,000 each month for 4 months. By the end of the fourth month, she has paid the full amount of ₹24,000 without any additional charges. This approach allows her to manage her finances effectively while acquiring the smartphone she needs.

BNPL services typically require minimal information to get started, such as your name, email address, and a valid payment method. Approval is usually quick, and the process involves a soft credit check that does not impact your credit score. It is important to note that while many BNPL plans are interest-free, missing a payment can result in late fees and may affect your credit rating.

In India, several BNPL providers offer services with varying credit limits and terms. For instance, Flipkart Pay Later offers a checkout process for up to ₹10,000, while ZestMoney provides personalised limits up to ₹60,000.

Before opting for a BNPL plan, it is essential to read the terms and conditions carefully and ensure that you can meet the payment schedule to avoid any penalties. Using BNPL responsibly can be a helpful tool for managing expenses and making necessary purchases without immediate financial strain.

Pros ans Cons of BNPL

Pros of BNPL

• Interest-Free Installments: Many BNPL services offer 0% interest if payments are made on time, making it a cost-effective alternative to credit cards.

   

• Easy Approval Process: BNPL providers often perform soft credit checks, making it accessible to individuals with limited or no credit history.

   

• Immediate Access to Products: Consumers can receive their purchases immediately, even while paying over time.

   

• Budget Management: Spreading payments over several weeks or months can help manage cash flow, especially for larger purchases.

Cons of BNPL

• Risk of Overspending: The ease of deferred payments can lead consumers to make purchases they cannot afford, increasing the risk of accumulating debt

   

• Late Fees and Penalties: Missing a payment can result in late fees, and some providers may report defaults to credit bureaus, potentially affecting credit scores.

   

   

• Limited Consumer Protections: BNPL services are generally less regulated than traditional credit options, which may limit dispute resolution and consumer rights.

   

• Complex Return Processes: Returning items purchased via BNPL can be complicated, as refunds may not immediately adjust the installment plan, leading to continued payments until the return is processed.

In summary, BNPL can be a useful tool for managing expenses and making necessary purchases without immediate financial strain. However, it is essential to use BNPL services responsibly, ensuring that you can meet the payment schedule to avoid potential pitfalls such as debt accumulation and credit score impact.

Personal Loan vs BNPL: A Comparative Overview

When Does a Personal Loan Make More Sense

A personal loan is a better choice when you need a larger amount of money for various expenses or to pay off other debts. Unlike Buy Now, Pay Later (BNPL), which is typically used for specific purchases, a personal loan offers more flexibility and longer repayment terms.

1. For Larger Expenses

If you are planning significant expenditures like home renovations, medical treatments, or education, a personal loan can provide the necessary funds. BNPL services usually have lower limits, making them unsuitable for such large expenses.

2. For Debt Consolidation

Managing multiple debts can be challenging. A personal loan allows you to combine these debts into one, potentially with a lower interest rate, simplifying your finances and possibly reducing your monthly payments.

3. For Predictable Payments

Personal loans come with fixed monthly payments over a set period, making it easier to budget and plan your finances. In contrast, BNPL payments can vary and are often due over shorter periods.

Cost Comparison Example: Personal Loan vs. BNPL

Let's compare the costs of borrowing ₹1,00,000 using a personal loan and a BNPL plan.

Note: While the BNPL plan appears cheaper overall, it requires higher monthly payments over a shorter period, which may not be manageable for everyone.

When Does BNPL Make More Sense?

A Buy Now, Pay Later (BNPL) plan can be a smart choice when you want to finance a specific purchase and can repay it within a short period. If you can pay off the amount in 3–6 months, you might avoid interest and fees, effectively getting a short-term, interest-free loan. BNPL is also attractive because it often requires minimal paperwork and quick approval, making it accessible even for those with limited or no credit history.

When to Choose BNPL

• Small, Specific Purchases: Ideal for items like electronics, furniture, or appliances.
• Short Repayment Period: Best if you can repay within 1–3 months.
• Quick Approval: Suitable for those who may not qualify for traditional loans.
• Avoiding Interest: It helps if you repay within the interest-free period.​

Cost Comparison Example: BNPL vs. Personal Loan

Let's compare the costs of purchasing a ₹30,000 smartphone using a BNPL plan and a personal loan.

Note: The BNPL plan is cheaper if repaid within 30 days. However, if the repayment period extends beyond the interest-free period, the cost can increase significantly.

Choosing between a personal loan and BNPL depends on your financial needs and repayment capacity. If you require a substantial amount for various purposes and prefer longer, predictable repayment terms, a personal loan is more suitable. However, for smaller, specific purchases that you can repay quickly, BNPL might be convenient. Always assess your financial situation and choose the option that aligns with your ability to repay.​

Conclusion

When deciding between a personal loan and Buy Now, Pay Later (BNPL), it all comes down to your needs and how you plan to repay. Personal loans are better for bigger expenses like medical bills or home repairs because they give you more money and a longer time to pay back. The interest rates are higher, but the payments are spread out, making it easier to manage. On the other hand, BNPL is great for small, immediate purchases like gadgets or clothes, especially if you can pay it off quickly without interest. But if you miss payments, the fees can add up fast. 

Both options have pros and cons, so think carefully before choosing. A personal loan is more flexible but costs more over time, while BNPL is convenient but risky if you can not pay on time. Always check your budget and pick the one that fits your situation. Borrowing money can help, but only if you use it wisely and repay it without stress.

FAQs

1. What is a personal loan?

A personal loan is money borrowed from a bank or lender that you repay in fixed monthly installments. It can be used for various needs like medical bills, weddings, or home repairs.

2. How does BNPL work?

BNPL lets you buy something now and pay for it later in small installments, often without interest. It is quick and easy, but only works with certain stores.

3. Which is cheaper, a personal loan or BNPL?

BNPL is cheaper if you repay on time with no interest, but personal loans cost less for big purchases if you need more time to pay back.

4. Can I get a personal loan with bad credit?

It is harder to get a personal loan with bad credit, and the interest will be higher. Some lenders may still approve you, but with stricter terms.

5. What happens if I miss a BNPL payment?

Missing a BNPL payment can lead to late fees and higher interest. It may also hurt your credit score if the provider reports it.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?