What Is ‘Phantom Debt’?

By: Anneken Tappe · January 09, 2024 · Reading Time: 2 minutes

New Debt on the Block

“Phantom debt” is a term economists use to describe debt that’s not centrally monitored. And this may include loans from Buy Now, Pay Later (BNPL) platforms.

BNPL has a part of the online shopping experience. But as the number of providers grows — from companies like Affirm (AFRM) and Klarna to major players like PayPal (PYPL) — it can be easy to lose track of how much money you owe.

The Benefits of BNPL

The BNPL business model has given Americans some rope in a tricky economic environment. By offering a set repayment schedule and making purchases more attainable in the short term, BNPL services are a useful tool in today’s high-cost world, especially for those who don’t have access to line of credit.

In fact, it may have been a boon to the economy as a whole. Despite the lingering effects of inflation, consumer spending, which drives some two-thirds of the U.S. economy, has held up — much to the surprise of many economists. And BNPL usage surged over that period.

The Risks of BNPL

While BNPL loans have their merits, they also come with important considerations. Platforms typically charge interest on the loans if you fail to meet the initial payments, sometimes in addition to late fees, deferred interest, or other penalties.

On top of that, there are fewer protections and regulations in place for consumers. Unlike credit card companies, BNPL companies aren’t required to consider your ability to repay a loan before approving one.

The Consumer Financial Protection Bureau has opened an inquiry into BNPL lenders.

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