Some types of debt can haunt you.
Buy now, pay later loans, in particular, can be difficult to track, making it easier for more consumers to get in over their heads, some experts say — even more so than credit cards, which are easier to account for, though From rising interest rates. High interest rates.
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Buy now, pay later is one of the fastest-growing categories in consumer finance, according to a separate report from Wells Fargo.
“Because there is no central repository to monitor it, the growth of this ‘phantom debt’ could imply that total household debt levels are actually higher than traditional measures,” said Tim Quinlan, chief economist at Wells Fargo and co-author of the report.
Since buy now, pay later, loans are not currently reported to major credit reporting agencies, making it difficult for a lender to know how many loans a consumer owes, Quinlan said.
“It's hard to know how much of that debt is out there,” said Ted Rossman, senior industry analyst at Bankrate. “It's this kind of shadow debt that hangs over people.”
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There's a reason why buy now, pay later companies like Affirm, Afterpay and Klarna are so popular among shoppers.
“With credit card interest rates of up to 20%, BNPL [buy now, pay later loan] “It gives consumers access to capital without increasing costs,” Quinlan said.
“What we have is a perfect business model for turbulent times,” Affirm co-founder and CEO Max Levchin recently said on CNBC’s “Squawk on the Street.”
However, managing multiple buy now, pay later loans with different repayment dates can also be a challenge, Quinlan added.
“BNPL may increase consumer debt, as consumers may be more likely to take on additional debt if they know they can spread payments,” he said. “You can bury yourself with low monthly payments.”
While typical terms might break the purchase into four equal, interest-free payments, not all buy now, pay later loans work that way.
“A lot of these plans extend over a longer period and even charge interest; I find that very ironic,” Rossman said. “It's like more and more credit cards — that can get people into trouble.”
Additionally, if a consumer fails to make payments, there may be late fees, deferred interest, or other penalties, depending on the lender.
Separate studies It also showed that installment purchases can encourage consumers to spend more than they can afford on impulse purchases.
“This could lead to debt problems, Quinlan said.
Buy now, pay later products are not regulated in the same way as credit cards, meaning there may be less protection for consumers, Quinlan said.
“What is even more concerning is that BNPL is doing this in virtual stealth mode as it flies largely under the radar of both regulators and policymakers,” Quinlan said.
Meanwhile, the Consumer Financial Protection Bureau He opened an investigation into buy now, pay later lenders.
The CFPB said it is particularly concerned about the lack of clear disclosures about the terms of loans as well as how these programs affect consumers' debt accumulation, what consumer protection laws apply and how payment providers collect data.
“Until definitive action is taken, there is no way of knowing when this phantom debt could create problems for the consumer and the broader economy,” Quinlan said.
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