You will be able to explain who pays for an interest-free instalment plan and why merchants offer it.
Ryan is 25 and a junior designer in Paya Lebar. He was buying a S$480 pair of running shoes online when the checkout page offered him three payments of S$160, no interest, no fees if he paid on time. He had planned to spend about S$300. At S$160 a month the shoes felt like a smaller decision, so he clicked through. Nothing about it cost him interest. It still cost him S$180 more than he meant to spend.
Buy now pay later, usually shortened to BNPL, is now an option at many online and in-store checkouts in Singapore. It splits a purchase into a few instalments, often three or four, usually over a few weeks or months, with no interest if you pay on time. That raises an obvious question: if you pay no interest, how does the provider make money?
The main answer is that the shop pays. When you check out with BNPL, the provider pays the merchant the full price, minus a fee, and then collects the instalments from you. The fee is the merchant's cost of offering BNPL, in the same way that a card fee is the cost of accepting cards.
Merchants agree to pay it because they expect to sell more. Providers pitch BNPL to shops as a way to get bigger baskets and fewer abandoned checkouts. Whether it works for a given shop is its own business. For you, the useful thing to notice is who is paying, and why: the fee is funded by extra spending, and the extra spending is yours.
If you pay every instalment on time, you pay the price of the item and nothing more. The cost to you starts when an instalment is late.
Most BNPL providers charge a late fee when a payment is missed, and the fee is set out in each provider's terms. One late fee on one plan is a nuisance. The problem comes when you have several plans running, which lesson 4.3, Why several small plans become one big problem, looks at in detail. In a tight month you can be charged three or four late fees at once. Each is small, and together they buy you nothing.
Missing payments can also lead to your account being suspended, which lesson 4.2, What the BNPL code of conduct asks of providers, covers. And how BNPL repayments are reported to Credit Bureau Singapore has been changing, so check the CBS website for how BNPL accounts currently appear on a credit report before you assume a missed BNPL payment is invisible to banks.
The third part of how BNPL works is the most important for your own decisions. A price split into parts feels smaller than the same price paid at once. S$160 sits more comfortably in the head than S$480, even though you will pay the S$480 either way.
The design is deliberate. A checkout that shows the instalment in large type and the total in small type is steering you to judge the purchase by the instalment. Once you start doing that, the question in your head shifts from whether you want to spend S$480 on shoes to whether you can manage S$160 this month. The second question is much easier to say yes to.
A simple check cuts through it. Before choosing instalments, ask whether you would buy the item at the full price, paid today, from money you already have. If the answer is yes, splitting the payment changes little. If the answer is no, the instalments are what is making the purchase happen, and that is worth noticing.
Banks also offer instalment plans on credit cards, either at the merchant's checkout or by converting a purchase after you have made it. These look similar to BNPL but work differently.
A bank card instalment plan sits on your credit card. The full price is usually blocked against your credit limit and released as you pay. Some plans are interest-free with no fee. Others charge an upfront processing fee, or interest, or both, and the cost may be shown as a fee rather than a rate, which makes it easy to overlook. Treat a fee on an instalment plan as a cost of borrowing and work out what it means as an EIR, as you did in lesson 3.3, Balance transfers: a cheap bridge with a fee and a deadline.
Because these plans run through your card account, they are part of your credit card record with the bank, and a missed instalment is a missed card payment. Read the plan's terms on fees, interest and what happens if you cancel or return the item.
Ryan's shoes cost him nothing extra in fees, and they still were not a good deal for him, because he would not have paid S$480 upfront. The useful habit is the full-price question, asked 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.
List the last three purchases where you were offered instalments and write whether you would have bought each at the full price upfront.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).