Buy Now, Pay Later Payment Plans Could Put Americans In ‘Phantom Debt’

Late payments may result in substantial late fees and interest rates, potentially reaching 30%.

The surge in popularity of “buy now, pay later” (BNPL) installment plans, a significant driver of consumer spending in the latter half of 2023, is now raising concerns about the potential economic repercussions associated with these quasi-loans, aptly dubbed “phantom debt.” Wells Fargo’s economists reported that BNPL loans reached $24.4 billion in 2021, a staggering 1,000% increase from 2019, constituting approximately 2.5% of the US credit card market, Business Insider reports.

One of the major challenges in assessing the impact of BNPL is the lack of comprehensive reporting to credit agencies. The Federal Reserve Bank of Philadelphia highlighted this issue, stating, “BNPL loans are not currently reported to any of the major credit reporting agencies, and the firms themselves are understandably reluctant to share proprietary data in a competitive environment.”

As the bills for these plans come due, concerns are escalating, especially following a surge in BNPL use during the 2023 holiday season. Adobe reported a 47% increase in BNPL use on Black Friday and a 43% rise on Cyber Monday. These plans offer an alternative to credit cards, allowing consumers to pay off debts without accruing interest over specific periods.

However, late payments may result in substantial late fees and interest rates, potentially reaching 30%. A survey by PYMNTS revealed that high-income earners, making at least $100,000 annually, had a 64% usage rate of installment plans in the previous 12 months, exceeding the overall rate of 60%.

While many consumers aim to meet payment obligations promptly, concerns arise as some may eventually resort to using credit cards to settle BNPL debts. This behavior, identified in a Social Science Research Network study, swaps a 0% interest rate for potentially high rates exceeding 20%.

Wells Fargo economists Tim Quinlan and Shannon Seery Grein underscored the potential impact on consumer debt, as the lack of a central repository for BNPL monitoring makes it challenging to gauge its prevalence accurately. Mark Luschini, chief investment strategist at Janney Montgomery Scott, suggested that the increased use of BNPL might indicate a strain on consumers, especially those grappling with credit card debt and auto loans.

While the extent of the issue remains uncertain, it raises concerns, say experts, about the potential long-term effects on consumer spending and the broader economy. As billionaire investor Warren Buffett cautioned, “If you don’t have leverage, you don’t get in trouble.” The escalating popularity of BNPL demands a closer look at its implications on consumer debt and economic stability.