Diwali, the festival of lights, is just around the corner, and it’s that time of the year when the streets are adorned with colorful lights, homes are decorated with intricate Rangoli patterns, and the spirit of celebration is in the air.
For many, it’s a time to come together with family and friends, exchange gifts, and indulge in delicious treats. However, it’s also a time when the temptation to splurge on shopping can be overpowering.
For the last few years, the financial landscape of Diwali has a new addition that might be contributing to this temptation: Buy Now, Pay Later (BNPL) schemes. While these micro-credit options seem like a convenient way to shop for the festivities, they come with their own set of risks. In this blog, we will explore the world of BNPL schemes and discuss why it’s crucial to exercise caution and not go overboard with shopping simply because you can buy now and pay later.
Understanding Buy Now, Pay Later Schemes
Buy Now, Pay Later schemes, also known as micro-credit, are a relatively recent phenomenon in the world of personal finance. They have gained immense popularity, especially among millennials and Gen Z consumers. The appeal is straightforward – it allows you to make a purchase without paying the full amount upfront. Instead, you can split the cost into smaller, more manageable payments, usually over a few weeks or months.
The mechanism typically involves a partnership between the retailer and a BNPL service provider. When you make a purchase, you select the BNPL option during the checkout process. The BNPL provider pays the retailer on your behalf, and you, in turn, commit to repaying the BNPL provider according to the agreed-upon schedule. Some BNPL services even offer interest-free periods, making it even more tempting for consumers.
The Diwali Shopping Frenzy
During Diwali, the urge to shop is amplified. From new clothes and jewellery to electronics and home decor, there are countless items that seem essential for the celebrations. BNPL schemes, with their promise of affordability and convenience, can be particularly seductive during this time. However, it’s vital to remember that these schemes are not without their pitfalls.
The Risks of BNPL Schemes
- Overspending: The most significant risk associated with BNPL schemes is the potential for overspending. Since you’re not required to pay the full amount upfront, it’s easy to lose track of your expenses. The convenience of spreading payments over time can lead to accumulating debts that become difficult to manage.
- High-interest rates: While some BNPL services offer interest-free periods, others come with high-interest rates if you miss a payment or don’t adhere to the agreed-upon schedule. These rates can quickly turn a seemingly affordable purchase into a costly one.
- Impact on credit score: Defaulting on BNPL payments or frequently using these schemes can negatively impact your credit score. A poor credit score can affect your ability to secure loans or credit in the future, making it harder to achieve your long-term financial goals.
- Hidden fees: Some BNPL providers may charge hidden fees, such as late payment fees or processing fees. It’s essential to read the terms and conditions carefully to understand the complete cost of your purchase.
- Impulse buying: BNPL schemes make it easy to make impulse purchases. Instead of taking the time to evaluate whether you genuinely need a particular item, you might buy it because it’s available under BNPL. This can lead to a cluttered home and wasted money on items that don’t bring lasting value.
Exercising Caution during Diwali Shopping
Now that we’ve discussed the potential risks associated with BNPL schemes, it’s crucial to outline how you can exercise caution and make responsible financial decisions during the Diwali shopping frenzy:
- Set a budget: Before you start shopping, determine a reasonable budget for your Diwali expenses. Consider all your financial obligations, including everyday expenses, and allocate a specific amount for Diwali shopping.
- Prioritise: Make a list of the items you truly need and prioritise them. It’s easy to get swept up in the excitement of shopping, so having a well-defined list can help you stay focused.
- Avoid impulsive decisions: When you find something attractive, take a moment to think about whether you genuinely need it. Avoid making on-the-spot decisions, and consider if you can find a similar item at a lower price.
- Compare prices: Don’t settle for the first deal you come across. Compare prices from different retailers and online stores to ensure you’re getting the best value for your money.
- Use cash or your credit card wisely: If you have savings set aside for Diwali shopping, consider using those funds. If you choose to use a credit card, be diligent in paying off your balance in full to avoid accruing interest
- Limit your use of BNPL schemes: While BNPL can be convenient, use it sparingly. Only choose this option if it genuinely makes financial sense and aligns with your budget.
- Read the fine print: Before opting for a BNPL scheme, thoroughly read and understand the terms and conditions. Know the interest rates, repayment schedule, and any associated fees.
- Keep track of your expenses: Maintain a record of your Diwali spending to ensure you’re staying within your budget. Many apps and software tools can help you track your finances efficiently.
Diwali is a time for celebration and togetherness, and it’s natural to want to make it special with gifts and decorations. However, the rise of Buy Now, Pay Later schemes adds a layer of complexity to our shopping decisions. While these micro-credit options can offer convenience, they also pose significant financial risks, especially when used irresponsibly.
The key to enjoying a financially responsible Diwali lies in setting a budget, prioritizing your spending, and exercising caution when considering BNPL schemes. Remember that the real spirit of Diwali isn’t measured by the extravagance of your purchases but by the love and happiness shared with your family and friends. By making mindful choices, you can ensure that your Diwali celebrations are not only joyous but financially sustainable in the long run.