Buy Now, Pay Later: Americans Racking Up Phantom Debt and the Risks of Everyday Spending
Consumers have embraced “Buy Now, Pay Later” products that allow them to pay for purchases in installments, but it’s not clear how many of these loans are out there. Americans are racking up “phantom debt” that Wall Street can’t track. It's hard enough for central bankers and Wall Street traders to make sense of the post-pandemic economy with the data available to them.
The Rise of Invisible Liabilities
At Wells Fargo & Co., senior economist Tim Quinlan is particularly spooked by the “phantom debt” that he can't see. That specter lurks behind buzzy “Buy Now, Pay Later” platforms, which allow consumers to split purchases into smaller installments. Regarding the lack of transparency, the major companies that provide these so called “pay in four” products, such as Affirm Holdings Inc., Klarna Bank AB and Block Inc.’s Afterpay, don’t report those loans to credit agencies.
As the industry evolves, brands must treat it as a fully integrated part of the customer journey. With new regulations transforming Buy Now, Pay Later (BNPL), the idea of a “totally connected” shopping experience is now here.
How BNPL Installments Work
Installments by Afterpay is a service that allows you to make purchases now and pay for them in four payments made every 2 weeks without any interest. Whether you're buying gas, groceries or clothes, you now have the option to defer payments over several months through installments, rather than pay in full at the time of purchase. Their promise of interest-free borrowing is compelling, but first-time customers will need to register and provide payment details.
The following table summarizes the core features of common BNPL services based on available data:
| Feature | Description |
|---|---|
| Payment Schedule | Four payments made every 2 weeks or weekly installments. |
| Interest Rate | 0% interest, provided the loan is paid off by the deadline. |
| Credit Reporting | Loans are generally not reported to credit agencies. |
| Eligibility | Typically requires a US credit/debit card and to be over 18 years of age. |
Everyday Spending and New Territory
The relatively new "0% loan" environment of BNPL, with shorter-term, lower-cost purchases, represents a seismic shift in the marketing and use of such loans. Often, payments must be made every week until the loan is discharged a month or two later. It's now even possible to buy lunch on a six-installment weekly repayment plan. As such, BNPL is frequently marketed to would-be borrowers for much smaller loans.
Risks and Financial Hardship
“Buy Now, Pay Later” apps can get you out of a jam when you need money quickly, but using them regularly for small purchases could create problems. What's worrying is that taking out small loans for lunch might not seem like debt. This is dangerous thinking. Anytime you borrow money that you are required to repay, regardless of whether or not interest is charged, it is debt.
Viewing it otherwise can lead you into trouble, as you may keep racking up "not debt" to the point where you can no longer afford the weekly payments. In comparison to traditional financing:
- Traditional 0% interest loans have been common for decades, often used to fund expensive home repairs.
- By enabling large expenditures without having to spend down a savings account, they help buyers afford what they need.
- However, failure to repay loans on schedule has resulted in financial hardship for less organized people.
- The 0% interest comes with a well-disclosed catch: Pay off the loan by the deadline or be charged interest from the beginning of the loan.
It's important to carefully consider your approach to credit before taking out any loan, but especially for loans with unfavorable terms, should you miss a deadline.
