Why Buy Now, Pay Later Loans ‘Ghost Debt’ Present A Threat To Consumers

Buy-now-pay-later (BNPL) “loans” – also known as “ghost debt” are becoming a popular form of payment. 

With these loans, consumers can enjoy the luxury of purchasing and paying for it at their leisure with zero interest or a low fixed interest rate. Klarna, Afterpay, and Affirm are the most popular “ghost debt” apps, according to Adobe Business. 

While experts like Senior Industry Analyst for Bankrate.com, Ted Rossman, think avoiding interest is “not that big of a deal,” they do feel these types of loans present opportunities to overspend, pay late, and get into trouble — symptoms that can turn into “phantom debt” or “ghost debt.” Rossman says debt creeps up because these companies fail to report outstanding loans to credit bureaus, making it difficult for the lender to know exactly how much debt the customer actually has. “You don’t necessarily need a great credit score to get one of these loans,” the analyst said.  

“If you’re a little bit late, it’s probably not going to hurt your credit because they usually don’t report to credit bureaus unless maybe you’re so late that you go to collections.” 

These loans present a hidden source of risk.

The Federal Reserve Bank of Kansas City conducted a study that revealed close to 20% of BNPL customers fell behind on payments, and the 33% who paid their bill within a month actually borrowed funds from a different lender, amounting to more debt, according to Florida Daily. Analysts also noted that credit ratings agencies are out of the loop with the amount of debt out there, with an estimated additional $700 billion not being accounted for.

In 2023, BNPL loans were increasingly popular amongst Black American shoppers, particularly for groceries. As the cost of groceries grew by 8.4%, almost half of Americans used installment loan apps, and of those, about 1 in 5 relied on loans to buy groceries. However, the risks are higher for Black and Hispanic users.

Black and Hispanic BNPL users have close to 70% in credit card debt and about $12,000 less in savings than those who don’t use the apps for assistance. Regardless of the staggering numbers, the industry continues to boost itself as the more flexible and consumer-friendly alternative to traditional credit cards. “Regardless of what the purchase is, BNPL is a healthier and more sustainable option compared to high-cost credit cards that encourage minimum payments, keeping people in debt longer with extortionate interest,” a Klarna spokesperson said. 

Experts claim better options exist for those still seeking to go the BNPL route. PayPal is likely to offer four equal interest-free payments every two weeks. But it’s best to read the fine print if consumers decide to take the loan.

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