Buy Now Pay Later: How It Works and What It Is Really Costing
A pay-later plan splits a purchase into instalments paid to a provider rather than to the shop. The shop is paid in full on the first day, so somebody funded the gap and somebody is being paid for it: the cost sits in the shop's fee to the provider, in the price itself, or in a late fee. A pay-later plan is credit, it is reported, and a missed instalment reaches further than the fee suggests.
Here is what sits underneath that answer. Every question about these plans becomes simple the moment the counting runs to three parties rather than two. A purchase in a shop has a buyer and a seller. A purchase on a pay-later planA purchase split into a small number of instalments paid to a separate company rather than to the shop that sold the thing. has a buyer, a seller, and a third company standing between them with its own money at risk for a few weeks. The third company is not doing it for nothing, and once the third company is in view, the missing interest rate stops being a puzzle.
What is a pay-later plan, and who are the three parties in it?
Start with something ordinary. A vegetable seller lets a household take a week of vegetables and settle on the Sunday. Now change one thing. A man from outside the lane pays the seller on Monday for the whole week, and the household settles with him on the Sunday instead. Nothing about the vegetables has changed, but there are three people in it now, and the man has been out of pocket for six days. He did not do that for the view.
A pay-later plan is that arrangement written down and repeated at scale: the household takes the thing today, a provider settles with the shop today, and the household settles with the provider over the following weeks. The providerThe company that pays the shop straight away and then collects the instalments from the household over the following weeks. is a separate business from the shop and usually from any bank the household deals with. The provider appears at the moment of paying and is gone from view once the purchase goes through.
Say the consequence plainly. There are three parties, and the household can watch only one of the three movements: itself, paying instalments. The household does not see the provider paying the shop, and it does not see what the shop pays the provider. Two thirds of the arrangement happens where the household is not looking, and the cost lives in the part it cannot see.
The shop was paid Rs 12,000/- on day one and the household paid nothing that day. Who funded the gap?
Who is paid, by whom, and when?
Dates matter here more than amounts, because the arrangement is built out of a gap in time. Follow Ira Bhosale's school tablet through it. On the day of the purchase the tablet goes home and the shop receives Rs 12,000/- from the provider, less whatever it has agreed to pay for the service. The household pays nothing that day. Then three instalments of Rs 4,000/- fall due on their dates, and each one goes to the provider rather than to the shop. The shop finished with this purchase on day one.
The order of payment puts the shop first, the provider second and the household last, the exact opposite of how the purchase feels from inside the household. From inside, the money has not gone, so it feels as though the purchase has not really happened yet. The feeling is accurate about the bank account and wrong about the transaction. Three instalments of Rs 4,000/- reconcile to Rs 12,000/- exactly and nothing is added on the way through. An exact reconciliation like that is what makes the plan look like no borrowing at all.
The plan states no interest rate anywhere. Does it cost the household nothing?
If nothing is called interest, where does the cost actually sit?
Somebody was out of pocket for weeks and somebody is being paid for it. Since the household paid Rs 12,000/- for a Rs 12,000/- tablet, the payment is arriving from somewhere else. There are three places it can be, and it is usually in more than one at a time.
The first is the merchant feeWhat the shop pays the provider out of the sale, so the shop receives slightly less than the ticket price in exchange for the sale happening at all.. A purchase that might otherwise not have happened now happens, and in exchange the shop receives a little less than the ticket price while the provider settles immediately and takes on the collecting. The household is not party to that and will never see the figure.
The second is the price itself. Where a shop pays a fee on every sale of this kind, that fee is a cost of trading like rent and electricity, and costs of trading end up inside prices. A fee carried inside the price is not a charge buried in a contract; it is ordinary business arithmetic, and no household can run the same purchase twice to find it.
The third is the late feeA flat charge added when an instalment reaches the provider after its due date. It is a fixed number of rupees rather than a rate on the amount., and it differs from the other two in one way that matters: it is the only one the household sees, it arrives in full and at once, and it arrives only when a month has already gone wrong. The two costs a household never sees are paid quietly by everybody, and the one cost it does see is paid by whoever had a bad month.
Why does the household usually not feel the cost?
Because for most purchases on most plans the household genuinely pays Rs 12,000/- for a Rs 12,000/- thing and nothing else happens. The absence of a visible charge is not a trick. The difficulty is that a cost which is invisible when everything goes to plan is easily read as no cost at all, and that reading survives right up to the month it stops being true. Think of a water connection with no meter and a flat monthly charge: nobody in that house feels the cost of an extra bucket, so nobody counts buckets.
A cost that is not attached to the moment of deciding cannot influence the decision, and that is a fact about how the arrangement is built rather than about how careful anybody is. So the useful question moves from what does this cost to what have I committed to, and on which dates, and that one has to be answered with a pen.
Is a pay-later plan credit?
Yes, and the word deserves a definition rather than a label. Credit is any arrangement where somebody hands something over now and settlement comes later. The tablet was in the house on day one and Rs 8,000/- of its price was still unpaid weeks afterwards, so somebody funded the difference in between. Funding that difference is borrowing, whatever the screen called it.
The word borrowing feels wrong here because the word carries a picture: a form, a signature, somebody assessing the applicant, a decision made on a particular afternoon. A plan has none of that furniture. But what makes something credit is the gap between receiving and paying, and that gap is the entire product here. So everything the household already knows about borrowing applies: a missed date has consequences, the obligation continues if the thing breaks, and it is owed to the provider rather than to the shop.
What reaches a credit record, and when does it start?
A pay-later plan is a commitmentA future payment a household is obliged to make, whether or not any document in the house lists it. like any other, and where a provider takes part in the credit information system, the plan is reportedSent by the lender or provider to the credit information companies, so that it appears on a household's credit record alongside its other commitments. to the credit information companies. A plan taken for a Rs 12,000/- tablet then sits on the same record as a vehicle loan. Two things go on rather than one. The commitment itself is neither good nor bad but simply a fact. The conduct is whether each instalment arrived on its date.
Which providers report, how quickly, and on what schedule are matters of practice that move and that differ between providers. The safe assumption for any household is that a pay-later plan is visible on its record and behaves there like any other credit line. The bodies that can answer it properly are named further down.
Is a pay-later plan credit?
What does a missed instalment trigger beyond the fee?
Now the worked instance, and the month has to come before the arithmetic. Ira Bhosale's school tablet was bought late in the second year for Rs 12,000/-, split into three instalments of Rs 4,000/- with nothing stated as interest. The first instalment fell due in the month Ashok Bhosale's counter took Rs 2,400/-, in the year the market lane was dug up for drainage work and the counter took Rs 52,800/- against Rs 96,000/- the year before.
Put that month on one sheet. Meghna Bhosale's take-home salary of Rs 39,800/- arrived as always and the counter added Rs 2,400/-, so Rs 42,200/- came in. Ordinary monthly outgoings, the fixed ones and the food and fuel together, run at Rs 37,920/-, and nothing about them had changed. Rs 42,200/- in against Rs 37,920/- out leaves Rs 4,280/-. The instalment due was Rs 4,000/-. The instalment was not forgotten and it was not deprioritised: it was competing with the last Rs 4,280/- of a month in which the counter took Rs 2,400/-, in a year that ran a deficit of Rs 20,640/-.
The instalment reached the provider 40 days after its date, and the plan added a flat late fee of Rs 500/-. The Rs 500/- is this household's own contracted term and no provider's actual charge. The shape of that fee is what matters: it is flat. A flat fee does not scale with the amount and does not scale with the delay. Rs 500/- on Rs 4,000/- is 12.5 per cent of the instalment, arriving in one piece.
Make it comparable with something the household already knows. Its own card carries a contracted rate of 3.5 per cent a month, again invented and again its own term. The same Rs 4,000/- held the same 40 days on those terms would have cost about Rs 187/-. The flat fee was Rs 500/-. The arrangement with no rate at all produced a charge close to three times what the highest stated rate in the house would have produced on the same money for the same days.
One more thing sits inside that Rs 500/-, and it is why the phrase for comparison only keeps recurring. The fee is not charged by time at all, so scaling the 12.5 per cent to a year the way any rate is scaled makes 40 days about 114 per cent a year, annualisedScaled up to a yearly figure so that two charges over different lengths of time can be compared. An annualised figure is a comparison device, not a price anybody is charging. for comparison and charged by nobody. The same fee at five days late gives over 900 per cent. At 120 days it gives about 38 per cent. The fee did not move. Only the days did.
So the tablet cost Rs 12,000/- plus Rs 500/-: Rs 12,500/- for a Rs 12,000/- thing, about 4.2 per cent added to the price. At 31 March two instalments had not yet fallen due, so Rs 8,000/- of the plan remained. Rs 12,500/- paid and Rs 8,000/- still to come is the whole of the money side, and it is the smaller half of what happened.
Rs 500/- on a Rs 4,000/- instalment held forty days. How does that compare with the household's own card at 3.5 per cent a month?
The reading that says this is not really borrowing
The reading is the most understandable one, most people hold it, and it is wrong in three ways. The first is the shop, paid in full on day one, so the gap was funded by somebody. The second is the fee, and Rs 500/- on Rs 4,000/- held forty days is a dearer price for a delay than the highest stated rate in the house. Neither is the one that costs most.
The third is that the plan is credit and is treated as credit by the systems that record credit. The instalment that arrived 40 days after its date, in the month Ashok Bhosale's counter took Rs 2,400/-, was reported, and it is one of the two things behind this household's score falling from 712 to 664, both figures invented. The Rs 500/- was charged once and finished. The entry did not finish, and nothing at the counter mentions it.
The cost that lands long after the fee is settled is the one that never appeared on the plan at all, and it arrived because a month went wrong rather than because anybody was careless. A lane was dug up for five months. The dug-up lane is the whole cause.
Which cost this household more, the Rs 500/- fee or the reporting of the late instalment?
Why is a pay-later plan easier to take on than any other borrowing?
The question is about how the arrangement is built rather than about how anybody behaves. The two are worth keeping apart: the second version is usually a way of blaming somebody. To take the two-wheeler loan, the household filled in a form, produced payslips and statements, waited to be assessed, signed a schedule of thirty instalments, and knew on a particular afternoon that it had borrowed Rs 82,000/-. There was a moment, and everybody in the house could name it.
To take the tablet plan, somebody at a counter selected three instalments instead of one payment. No form, no assessment the household experienced, no schedule handed over, no afternoon. A pay-later plan is easier to take on than any other borrowing because it arrives inside the purchase rather than as a separate act, so the decision being made is which tablet rather than whether to borrow. Three details do that work: it is offered at the moment of paying, it is presented as the smaller number, and nothing in the flow looks like a debt. All three are design choices, and none is a fact about the person at the counter.
What makes a pay-later plan easier to take on than a loan of the same size?
How do several small plans become one commitment nobody totalled?
One plan of Rs 12,000/- is a small thing. The difficulty starts at three, for a reason that has nothing to do with the size of any one of them. Each plan is agreed separately, at a different counter, on a different day, and nothing brings them together afterwards. A loan has a schedule. A card has a monthly bill. A plan has three dates and no document listing them beside the dates of any other plan.
Ten shops in one street can each be owed a small amount by the same household, and none of the ten knows about the other nine. Ten small debts with no common view is the shape of the arrangement. Three plans of Rs 12,000/- are one commitment of Rs 36,000/-, close to a month of this household's entire outgoings, and the only place that total exists is in the head of whoever has been keeping count.
Three pay-later plans running at once, each Rs 12,000/- in three instalments of Rs 4,000/-, taken one month apart. Before the control below is touched: what does the worst month cost?
Add plans, change how far apart they were taken, and watch the worst month move.
Every plan here is the household's own invented Rs 12,000/- tablet plan repeated: three instalments of Rs 4,000/-, one a month. Two things can be varied, how many plans are running and how far apart they were taken. The panel opens on three plans taken one a month, and those three commit Rs 36,000/- in total and put Rs 12,000/- into the worst month. The dashed line is Rs 1,880/-, the most this household ever had spare in a month, in the year before the lane was dug up.
Four readings matter most. At the default, three plans taken one a month, Rs 36,000/- is committed and the worst month takes Rs 12,000/-, more than six times the Rs 1,880/- this household had spare in a month in its better year. Move to six plans and the total doubles to Rs 72,000/- while the worst month stays at Rs 12,000/-. Only three instalments can ever overlap, so the worst month simply repeats and the run stretches from five months to eight. Press all in the same month with six plans and the worst month leaps to Rs 24,000/-, over in three months. Press one every two months with three plans and it falls to Rs 8,000/- across seven months. The total committed depends only on how many plans there are and the worst month only on how they were spaced. A household can therefore be surprised by a month it never chose.
What does a household write down when the plan sends no statement?
A card issuer sends a bill every month whether the household wants one or not, and that bill quietly does a job nobody notices: it totals things. A pay-later plan usually sends no statementA periodic summary of what is owed and what is due next. A card sends one every month; these plans usually send nothing of the kind. at all. So the totalling has to happen somewhere else, and the only place left is a sheet of paper in the house.
The sheet needs six lines per plan, written once, at the counter or the same evening, in the same place as every other plan. The cost is usually nothing and the commitment is always something, so what a household writes down is not what the plan costs but what it commits. Here is the register for the tablet plan, filled in.
| The line | The tablet plan, as written down |
|---|---|
| What was bought, and when | A school tablet for Ira Bhosale, late in the second year |
| The total taken on | Rs 12,000/- |
| The instalments | 3 of Rs 4,000/- |
| The date each one falls due | All three dates, written down before the first one arrives |
| Paid so far, fee included | Rs 4,500/- |
| Still to pay | Rs 8,000/- |
Two of the six lines earn the effort. The dates matter because overlapping months are visible only when the dates of every plan sit on one sheet. The still to pay line matters because it exists nowhere else: until the household writes it down, the household is the only party carrying the obligation who cannot state its size.
The plan sends no statement. What is the one thing the household most needs on its own sheet?
How does somebody assessing this household read these plans?
Knowing what happens on the other side of the counter helps, and it is more mechanical than most people imagine. A clerk assessing a household for new borrowing does two things with a pay-later plan: the instalment is added to the household's other monthly credit payments, and the conduct on the record is read, meaning whether payments arrived on their dates.
Work the first one here. At 31 March, with the two-wheeler loan cleared in January on schedule with its thirtieth instalment, the payments on credit were the card minimum of Rs 2,558/- and the plan instalment of Rs 4,000/-. Together they come to Rs 6,558/- a month. Against net monthly income of Rs 44,200/- that is 14.8 per cent, and against gross monthly income of Rs 50,400/- it is 13.0 per cent. The same household reads as 14.8 per cent on one income and 13.0 per cent on the other with nothing changed but the denominator, so always say which income a ratio was built on.
Wind back to January, when the vehicle loan still ran. Rs 3,150/- on the loan, Rs 2,030/- on the card and Rs 4,000/- on the plan is Rs 9,180/-: 20.8 per cent of net and 18.2 per cent of gross. The plan instalment is 43.6 per cent of that. A commitment nobody in the household would have called borrowing was, for those months, the largest single credit payment it was making.
Who sets the rules these plans run under
The three parties and the three places the cost can sit hold anywhere. Who supervises them does not. In India the conduct expected of lenders, and of arrangements that carry credit to a household at the moment of paying, is a matter for the Reserve Bank of India, whose material is published at rbi.org.in: what must be disclosed to a borrower, how a digital lending arrangement is expected to behave, and the route a household takes when a complaint has not been resolved. Conduct requirements change, and the current position is the one published at that source.
The reporting described here goes to the credit information companies. A household in India can obtain its own credit record and can raise a dispute where an entry is wrong. The steps in that process, and how long each one takes, are questions for those companies and for the Reserve Bank of India as the authority behind them.
References
| Source | Document | Where |
|---|---|---|
| Reserve Bank of India | Material on lending conduct, on what must be disclosed to a borrower, on digital lending arrangements and on the grievance route | rbi.org.in |
| The credit information companies | Material on what a credit record holds, on how a commitment and its payment conduct are recorded, and on how a household obtains its own record and raises a dispute | rbi.org.in |
| Central Board of Direct Taxes | Material on the records a household is expected to keep in support of what it has reported, where a purchase receipt and an instalment record can matter | incometaxindia.gov.in |
The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.