At a Glance

The world of finance is constantly evolving, and one trend that has gained immense popularity is the Buy Now, Pay Later (BNPL) payment method. As consumers embrace the convenience and allure of splitting payments into bite-sized chunks, a darker phenomenon called “phantom debt” lurks in the shadows. This article will explore the phenomenon of phantom debt in the context of BNPL, exploring what consumers should be wary of in this financial dance.


57% of Gen Z

Of consumers who used a BNPL platform used PayPal Credit.

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BNPL and what consumers need to know about it

The holiday shopping season in 2023 witnessed a surge in the popularity of “Buy Now, Pay Later” (BNPL) loans, contributing to a record-setting trend. However, beneath the seemingly convenient and flexible payment options lies a phenomenon economists are dubbing “phantom debt.”

Phantom debt refers to the hidden risks associated with BNPL loans. Unlike traditional debt, these obligations don’t always appear in credit bureau reports or public data, creating an unseen financial burden for consumers.

The emergence of BNPL loans, viral among younger and lower-income Americans, has raised concerns. Individuals in their 20s and 30s, the primary users of pay-later loans, may be driven by financial difficulties or inadvertently pushed into excessive spending. Influenced by TikTok and friends, young people find themselves overspending on clothes and beauty products. The ease of continuously clicking to make purchases can make you lose track of payments, realizing the consequences in a grocery checkout line.

Phantom debt is not just about the amount spent but also the potential financial strain it imposes. As the holiday season unfolded, consumers faced intensified challenges, making it necessary to abstain from holiday shopping to pay off accumulated debts.

The rise of BNPL

BNPL loans, which allow consumers to split payments into installments, have gained immense popularity, particularly during the holiday season. They became prominent during the pandemic-driven surge in online shopping. Offered as a modern iteration of layaway programs, these loans allow users to split payments into installments, often interest-free. This trend has continued due to the high prices and interest rates associated with traditional payment methods.

Services provided by companies like Klarna, Affirm, Afterpay, and PayPal have rapidly grown, attracting consumers and retailers alike. The total spending through BNPL options is estimated to be around $46 billion, a relatively small figure compared to credit card usage but still significant in its impact on certain demographics.

The convenience and benefits of BNPL have been a significant driver of its adoption. Younger and lower-income Americans, in particular, have embraced this payment method, enticed by the ease of making purchases without the immediate financial burden. The flexibility of paying in installments, often without interest, has made BNPL an attractive option for various consumer segments.

While BNPL companies argue that their products are better for borrowers than traditional credit cards or payday loans, concerns are growing about the potential risks and hidden sources of financial strain. The lack of routine reporting to credit bureaus raises questions about the accuracy of traditional measures of consumer credit health.

Phantom debt in BNPL

The path from “Buy Now, Pay Later” (BNPL) transactions to the enigma of phantom debt is a nuanced journey driven by the intricacies of this increasingly popular payment method. Here are some of the factors contributing to the emergence of phantom debt.

1. Deferred interest deception

BNPL transactions often offer interest-free payments for a specified period. Consumers are enticed by the prospect of spreading the cost over time without incurring additional charges.

However, the deferred interest component plays a crucial role. If consumers fail to pay within the prescribed time frame, they may face deferred interest, late fees, and penalties, turning what seemed like a cost-effective solution into a potential financial burden.

2. Lack of reporting to credit bureaus

Unlike traditional loans and credit cards, BNPL transactions are not routinely reported to credit bureaus. This creates a significant blind spot in assessing consumers’ overall financial health.

The absence of reporting makes it challenging for lenders to gauge the full extent of consumers’ outstanding debts, leading to an accumulation of what economists term “phantom debt.”

3. Multiple loans and hidden liabilities

Consumers often simultaneously engage in multiple BNPL transactions, each treated as a separate loan. This can result in a fragmented view of an individual’s financial obligations.

Without a comprehensive reporting system, BNPL providers remain unaware of consumers’ other debts within the same realm, further contributing to the obscured landscape of phantom debt.

4. Potential for overspending

The ease of BNPL transactions, often requiring just a few clicks, can lead to impulsive and excessive spending. Consumers may be lured into a false sense of complacency by the small, manageable payments associated with BNPL.

This convenience factor, combined with the lack of transparent reporting and regulation, raises concerns about consumers burying themselves in low monthly payments and accumulating more debt than they can manage.

Risks and pitfalls of phantom debt

Ignoring phantom debt, particularly in the context of “Buy Now, Pay Later” (BNPL) transactions, can have several potential consequences that may impact individual consumers and the broader financial landscape. Recent data reveals that BNPL purchases reached a staggering $16.6 billion during the holiday season, contributing to a year-over-year increase of 14%. Throughout 2023, BNPL spending amounted to $75 billion, marking a substantial growth in the flexible payment option. However, concerns linger about the lack of clarity on the full extent of the industry and the financial health of BNPL users.

1. Financial strain for consumers

Phantom debt, which remains unreported or unnoticed, can lead consumers to underestimate their financial liabilities. This can result in unexpected financial strain as deferred interest, late fees, and penalties accumulate, making it challenging for individuals to manage their overall debt load.

2. Credit score implications

Since BNPL transactions are not routinely reported to credit bureaus, ignoring phantom debt can affect consumers’ credit scores. Lenders may lack a comprehensive view of individuals’ financial obligations, potentially leading to lower credit scores and reduced access to traditional credit in the future.

3. Accumulation of hidden debt

Ignoring phantom debt allows hidden liabilities to accumulate, especially when consumers engage in multiple BNPL transactions simultaneously. The lack of awareness about the full extent of these financial obligations may lead to a snowball effect, with debts piling up over time.

4. Risk to financial stability

On a broader scale, the accumulation of phantom debt across a significant portion of consumers can pose a risk to financial stability. If a substantial number of individuals face financial strain simultaneously, it could contribute to economic challenges, affecting sectors reliant on consumer spending.

5. Regulatory scrutiny and intervention

As the prevalence of BNPL transactions grows, regulators may intensify scrutiny and intervention to address the potential risks associated with phantom debt. Ignoring these concerns could lead to regulatory measures that may impact the operations and profitability of BNPL providers.

6. Impact on industry reputation

Continued ignorance of phantom debt issues may tarnish the reputation of the BNPL industry. Consumer trust could erode if there is a perception that providers are not transparent about the potential risks and consequences associated with their services.

7. Increased defaults and delinquencies

Phantom debt may increase defaults and delinquencies if consumers cannot manage the hidden financial burdens. This, in turn, could impact the profitability and sustainability of BNPL providers.

8. Potential economic consequences

If widespread financial strain results from ignored phantom debt, there could be broader economic consequences. Consumer spending patterns may shift, affecting businesses and contributing to economic fluctuations.

Regulatory measures and consumer protections

The BNPL industry operates with minimal regulation compared to credit cards. The lack of clear disclosures and standardized reporting practices makes it challenging for regulators and consumers to navigate this evolving financial landscape. The absence of stringent oversight allows BNPL to operate in what economists and experts describe as “de facto stealth mode,” flying beneath the radar of regulators and policymakers.

As the BNPL industry thrives, regulators, including the Consumer Financial Protection Bureau (CFPB), closely monitor its momentum. Questions about clear disclosures, consumer protection laws, and the accumulation of consumer debt remain central to the ongoing inquiry into BNPL lenders.

How to protect yourself

Avoiding phantom debt traps associated with “Buy Now, Pay Later” (BNPL) services requires careful financial planning, awareness, and responsible borrowing practices. Here are some tips and strategies for consumers to navigate BNPL transactions wisely:

  • Understand the terms and conditions: Before engaging in any BNPL transaction, read and understand the terms and conditions carefully. Pay attention to details like repayment schedules, deferred interest, and potential fees or penalties.
  • Limit the number of BNPL transactions: Avoid engaging in multiple BNPL transactions simultaneously. Managing several repayment schedules can become overwhelming and increase the risk of overlooking payments.
  • Create a budget: Establish a realistic budget that includes all financial obligations, including BNPL payments. Ensure that your budget aligns with your income and allows for timely repayment of BNPL loans.
  • Monitor your bank statements: Regularly monitor your bank statements to track BNPL transactions and ensure that payments are deducted as scheduled. Detecting discrepancies early can prevent the accumulation of hidden debt.
  • Set payment reminders: Utilize reminders, whether through mobile apps or calendar alerts, to prompt you about upcoming BNPL payments. Timely reminders can help you stay organized and avoid late fees.
  • Avoid impulse spending: Resist the temptation of making impulsive purchases through BNPL. Carefully evaluate whether a purchase is necessary and fits within your budget before opting for BNPL as a payment method.
  • Check for reporting to credit bureaus: Opt for BNPL providers that report transactions to credit bureaus. This can positively impact your credit score and ensure responsible repayment behavior is reflected in your credit history.

Alternatives to BNPL

Consumers seeking alternative payment methods that may be less prone to phantom debt and offer greater transparency and predictability can explore several options. Here are some alternatives to traditional credit cards and BNPL services:

1. Debit cards

Debit cards deduct funds directly from a checking or savings account, eliminating the risk of accumulating debt. They offer a convenient way to make electronic transactions without needing credit.

2. Traditional credit cards

While credit cards come with interest rates, fees, and potential debt accumulation, they provide a transparent and regulated lending framework. Responsible use, timely payments, and understanding the terms can help consumers manage credit effectively.

Compare: Best Credit Cards

3. Prepaid cards

Prepaid cards are loaded with a predetermined amount of money, allowing consumers to spend only what they’ve loaded onto the card. This limits the risk of overspending and accumulating hidden debt.

4. Mobile wallets

Mobile payment apps like Apple Pay, Google Pay, and Samsung Pay enable secure transactions using linked debit or credit cards. They often provide real-time transaction notifications, enhancing awareness of spending.

More: 5 Best Digital Wallets

5. Direct bank transfers

Some merchants and services allow direct bank transfers for payments. This method involves transferring funds directly from the consumer’s bank account to the recipient without credit.

Credit Card vs. BNPL: The pros and cons

Traditional credit card


  • Established credit history: Responsible credit card use contributes to building a positive credit history, which can be beneficial for future financial endeavors.
  • Wide acceptance: Credit cards are widely accepted globally, providing convenience for various online and offline transactions.
  • Credit rewards: Many credit cards offer rewards programs, including cashback, points, or travel benefits, providing additional perks for cardholders.
  • Emergency spending: Credit cards can serve as a financial safety net for unexpected expenses or emergencies, allowing immediate access to funds.
  • Regulated and transparent: Credit card terms and conditions are regulated by consumer protection laws, ensuring transparency in fees, interest rates, and billing practices.


  • Interest charges: If the total balance is not paid by the due date, credit cards may accrue high-interest charges, potentially leading to debt accumulation.
  • Annual fees: Some credit cards come with annual fees, reducing the overall cost-effectiveness for users who may not fully utilize the offered benefits.
  • Risk of overspending: The ease of credit card use may lead to impulsive spending, resulting in debt accumulation that can be challenging to repay.

Buy Now, Pay Later (BNPL)


  • Interest-free periods: BNPL services often offer interest-free periods, allowing users to make purchases without incurring interest if repaid within a specified timeframe.
  • Accessible to non-credit card users: BNPL services can be more accessible for individuals without a credit card or those with limited credit history.
  • Transparent repayment plans: BNPL services typically offer clear and transparent repayment plans, making it easier for users to understand the total cost of their purchases.
  • No impact on credit score: BNPL transactions may not impact credit scores, as they are often not reported to credit bureaus, providing privacy for users.


  • Deferred interest: Some BNPL agreements may include deferred interest, where users are charged interest if the full amount is unpaid within the specified period.
  • Limited credit building: Unlike credit cards, BNPL transactions may not contribute to building a positive credit history as they are often not reported to credit bureaus.
  • Potential for overspending: The ease of making installments may encourage users to overspend, leading to financial strain when managing multiple payments.
  • Limited acceptance: BNPL services may not be universally accepted, limiting their usability compared to credit cards.

Bottom line

The surge in Buy Now, Pay Later (BNPL) transactions has given rise to phantom debt, creating potential financial pitfalls for unsuspecting consumers. The concept of deferred interest and the lack of reporting to credit bureaus contribute to the opacity surrounding BNPL transactions, making it crucial for users to grasp the implications of their financial choices. The key takeaway underscores the importance of consumer awareness and responsible financial decisions. As consumers navigate the allure of BNPL services, staying informed about terms, fees, and potential risks is paramount. Make informed decisions, carefully assess the terms of BNPL agreements, and consider alternative payment methods that align with their financial goals. Knowledge is the greatest asset in ensuring a secure and informed financial approach.