The potential for future economic issues due to the use of buy now, pay later debt in the U.S.

A recent report from NerdWallet indicates that buy now, pay later options are increasingly available to consumers, with a quarter of Americans surveyed in April 2024 stating that they utilized these services in the past 12 months.

Nearly 1,100% increase in buy now, pay later loans occurred between 2019 and 2021, as per data from the Consumer Financial Protection Bureau.

Some analysts are concerned about the rapid growth due to the uncertainty of the amount of debt that still exists where loans are made.

If we cannot determine the growth rate of the "Buy Now, Pay Later market, we cannot predict when it will become a problem, despite its current small size as stated in a December 2023 report from Wells Fargo.

Shannon Grein, one of the authors of the December note, explained to CNBC that this phenomenon, often referred to as phantom debt, is not well understood and is typically overlooked.

"According to Penny Lee, president and CEO of the Financial Technology Association (FTA), the idea that there is a phantom debt out there is not accurate. The FTA, which represents four of the largest buy now, pay later providers, including Klarna, Afterpay, Zip, and PayPal, has access to publicly reported information on the number of loans taken out and the default rate. The default rate is very low."

Grein highlights that she believes the debt is not severe enough to cause an explosion, but rather the issue lies in the inability to monitor the amount of debt and the number of consumers falling behind on payments.

"The first step in addressing the biggest challenge is to monitor its size," she stated. "After that, we can determine if it's a concern for consumers."

The consequences of unmonitored debt

The growth rate of buy now, pay later loan debt is unknown to economists, regulators, and analysts, which may result in unforeseen economic consequences.

To accurately assess the financial sector's health, it is essential to comprehend the total debt burden and its manageability against household income, according to Grein.

People's credit scores are not typically affected by buy now, pay later companies since they do not report information to the major credit bureaus.

"Grein stated that regulators are attempting to regulate this segment in a manner similar to credit card debt, despite the differences, in an effort to monitor and control it as a source of financial instability for households. If someone defaults on one of these loans, it will be reported in a bankruptcy report, but it will only appear on a consumer profile in that manner."

A buy now, pay later option is not equivalent to a credit card because it is linked to a specific purchase rather than providing a long-term, revolving credit line.

"Every time you take out a buy now, pay later loan, it appears as though you have maxed out your credit, resulting in a negative score," Lee stated. "Therefore, we believe that these products should improve consumer scores, credit history, and scoring. The industry has been collaborating with credit rating agencies to modernize their scoring methods, but this process is still ongoing."

The video above explains why phantom debt is a growing concern for U.S. consumers and the economy.