Explain who pays for an interest-free instalment plan and why merchants offer one.
When you pay for something in Singapore, online or at a shop counter, the checkout often offers to break the bill into smaller payments. There is usually no interest attached, so the option can look like something you get for free. Before you use it, it helps to know who actually funds it and at what point it starts taking money from you. It also helps to know how it compares with the instalment plans banks run on credit cards.
With buy now pay later (BNPL), a purchase is divided into a small number of instalments, commonly three or four, which fall due over a few weeks or months. Pay each one by its due date and you normally pay no interest.
Most of the provider's income comes from the shop. When you check out, the provider sends the merchant the full price less a fee, and you then repay the provider in instalments. The amount the provider keeps is the merchant fee. For the shop it is the cost of offering BNPL, much like the fee it already pays so that customers can use cards.
Shops agree to this fee because they expect to sell more. Providers market BNPL to merchants on the promise of larger baskets and fewer customers giving up halfway through checkout. Whether that works out for any one shop is the shop's business. For you, the relevant point is where the merchant fee money comes from. It is funded by extra spending, and the extra spending comes from shoppers like you.
Ryan is 25 and a junior designer in Paya Lebar (an invented example, and the figures that follow are invented too). Ryan wants a pair of running shoes from an online store, priced at S$480. The checkout offers three payments of S$160, with no interest and no fees as long as each is paid on time. Three payments of S$160 add up to S$480, which matches the price.
Ryan had planned to spend about S$300 on shoes. Seen as S$160 a month, the shoes seem like a smaller decision, and Ryan clicks through. No interest is charged, yet Ryan ends up spending S$180 more than intended (S$480 - S$300 = S$180).
Splitting a price into parts makes it feel smaller than paying it in one go, although the total stays the same. S$160 feels like less of a commitment than S$480. Checkout pages are built around this effect. The instalment is often printed in large type and the total in small type, which nudges you to judge the purchase by the instalment. The question in your head moves from whether you want to spend the full price to whether you can manage the instalment this month, and the second is much easier to say yes to.
To counter this, ask yourself the full-price question before you pick instalments: would I buy this item at the full price, paid today, from money I already have? When the honest answer is yes, splitting the payment makes little difference. When the answer is no, the instalments are what is pushing the purchase through, and you should notice that before you click.
Ryan's shoes cost nothing extra in fees. They were still a poor deal, because Ryan would not have paid S$480 upfront. Paying no fees does not make a purchase a good one if you would have turned down the full price at the start. At checkout, the full-price question is what Ryan needed to ask.
As long as every instalment arrives on time, you pay the item's price and nothing more. Costs start when a payment is late. Most BNPL providers charge a late fee for a missed instalment, and the amount is set out in each provider's own terms.
A single late fee on a single plan is an annoyance. The larger risk comes from running several plans together. When money is short in a given month, someone with several plans can be charged three or four late fees at once. None of them is large on its own, and all of them together buy you nothing. Lesson 4.3, "Why several small plans become one big problem", goes through this risk in detail.
Missing payments can also get your BNPL account suspended. Lesson 4.2, "What the BNPL code of conduct asks of providers", explains how suspension works.
BNPL repayment records are kept apart from the credit information that banks share. Singapore has separate credit information sharing schemes for financial institutions such as banks and for non-bank lenders such as BNPL providers. Under the BNPL Code, BNPL providers must take part in a BNPL credit bureau. Check with the Monetary Authority of Singapore (MAS) for how these schemes currently work.
Banks run their own instalment plans on credit cards. You may be offered one at the merchant's checkout, or you can ask the bank to turn a purchase into instalments after you have made it. These plans resemble BNPL, but they operate differently.
A bank card instalment plan lives on your credit card. The bank usually blocks the full price against your credit limit and frees it up as each instalment is paid. Some plans are interest-free and charge no fee. Others charge an upfront processing fee, interest, or both. The cost may appear as a fee instead of a rate, which makes it easy to miss. Because the plan is part of your credit card record with the bank, a missed instalment is treated as a missed card payment.
Before you sign up for one, go through three checks. First, find out whether there is an upfront processing fee, interest, or both. Next, express any fee as a rate: treat it as a cost of borrowing and calculate it as an EIR, using the method from Lesson 3.3, "Balance transfers: a cheap bridge with a fee and a deadline". Last, read what the terms say about fees, about interest, and about what happens if the item is cancelled or returned.
You can also use the full-price question on purchases you have already made. The useful habit is to ask that question honestly about things you have already bought. Think of the last three times a checkout offered you instalments, whether you took them or not, and ask the same question Ryan should have asked about the shoes.
Write down the last three purchases where you were offered instalments. Next to each, write whether you would have bought it at the full price, paid upfront.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).