Buy now pay later ‘phantom debt’ is on the rise

The buy now pay later (BNPL) payment options, which rose to popularity with increased online shopping during the pandemic, have led to a surge in short-term debt among consumers.

A senior economist at Wells Fargo refers to these loans as “phantom debts” that mostly go unaccounted for by those tracking debts among Americans.

Shopping done via BNPL reached a record $16.6 billion last holiday season, up 14% from 2022. Adobe Analytics estimates that $19.2 billion was spent using this option or payment in the first quarter of 2024 alone.

Forecasts indicate the BNPL market could reach nearly $700 billion globally by 2028.

Why is it popular?
BNPL programs allow consumers to make immediate purchases and pay in instalments, often with fixed payments and no interest, typically divided over four periods. 

But missed payments receive late fees and penalties. There are also concerns about people forfeiting payments as usually financially fragile individuals use this program.

The phantom debt problem
Major players, like Affirm, Klarna, and Afterpay, are not obligated to report BNPL loans to credit agencies, making it difficult for Wall Street to monitor debt in the country effectively. And how much debt Americans accumulate plays a major role in the Federal Reserve determining rate hikes.

The issue has led to debates between major BNPL providers and credit agencies about reporting practices.