We know about ‘Buy Now, Pay Later’ (BNPL). We know about platforms that allow us to pay rent using a credit card. If we combine these two products, a resulting permutation could be ‘Rent Now, Pay Later’ (RNPL). Transfer Rent on credit. And credit comes through a loan and not a credit card. Such a feature is now a reality. Housing.com, a real-estate search platform, has launched this product in tie-up with NIRO, an NBFC. Let’s find out more about RNPL.
How Does Rent Now, Pay Later Work?
I write about the way Housing.com is doing it.
- You get instant credit for paying off the house rent. The credit comes from a bank or an NBFC.
- You get 40 days to pay off the loan without any interest. You also have an option to convert the loan into EMIs.
- There is no convenience fee, at least for now.
No extra cost if you pay within 40 days. Nothing wrong here. Except that your credit report will show a new loan every month.
How Does Rent Now, Pay Later (RNPL) Compare with Paying Rent through Credit Card?
There are 3 reasons for you to pay rent using a credit card despite the convenience fee.
- The rewards / cashbacks / benefits of paying rent using a credit card outweighs the cost. Note that the rent is a big expense. Bigger the expense, the more the benefits.
- You have a cash flow mismatch. You must pay rent on the 1st, but the salary gets credited on the 10th of each month.
- Your cash flows are stretched or you are struggling for cash. Paying rent through credit cannot be a long term solution.
When you use a credit card to pay rent, you must incur additional cost even if you pay your dues on time. The additional cost is in the form of convenience charge or platform fee, or any other name. It could be a fixed fee or a percentage of rent. In the current RNPL avatar (as offered by Housing.com), there is no convenience fee. RNPL scores here.
If you must pay rent using credit for rewards and benefits, a credit card is a better choice. In the case of RNPL, there are no rewards or benefits.
If you must pay rent using credit to tide over a short term cash flow mismatch, the RNPL is a better choice since there is no convenience fee.
If your reasons for paying rent using credit are structural cash issues, either is a problem. Using credit to pay rent will only compound problems.
Should You Pay Rent Using Credit?
House rent is one of the biggest expense items on the monthly budget and it is convenient to have an option to pay rent using a credit card or loan. However, that does not mean you must exercise the option.
The simplest and the most sensible approach is to pay rent directly from your bank account. No extra cost. You have a better control of your cash flows. With credit, there is always a chance of overspending.
If you want to over-optimize for reward points or earn a few weeks of interest-free credit, you can try credit card or RNPL. I wouldn’t advise this in most cases though.
How Is the Credit Funded under RNPL and Credit Card?
Under RNPL, there’s no transaction or convenience fee. No interest if you pay within 40 days. Only after 40 days, the penalties or interest come into picture. When there is a loan, there must be interest paid to compensate the lender. Or else such a structure is not commercially viable over the long term.
Consider credit card purchases. You get an interest free credit period of 45-52 days. You don’t pay anything, but the merchant compensates the lender (partner banks) and the card network in the form of Merchant Discount Rate (MDR).
Under RNPL, you can’t expect the landlord/owner to shell out anything.
In fact, you have the same problem if you pay rent using a credit card. The landlord/owner does not and would offer any cut. The banks and NBFCs won’t offer loans without interest. In fact, the banks can’t offer zero-percent loans even if they want to. Therefore, such platforms allowing you to pay rent using a credit card have now started charging a convenience fee (nomenclature may change) to fund the cost of credit.
Under RNPL (as being offered currently by Housing.com), you pay zero convenience fee. No interest for 40 days. The interest kicks only if you don’t pay within 40 days or convert the rent into an EMI.
And any model that relies on stressed borrowers (and does not earn anything from good borrowers) is on shaky grounds. Look at credit cards. Credit cards also charge exorbitant interest for late payments, but the MDR is the lifeline.
For now, it seems the platform (Housing.com) is funding the cost of credit from its books. I would expect the free lunch to end and convenience fee to kick in soon.
Source / Additional Reading
- Economic Times: Rent Now, Pay Later
- MoneyControl: Rent Now, Pay Later: A Convenient option for tenants