Are Buy Now, Pay Later loans too good to be true?

Buy now, pay later (BNPL) loans – also called “spiritual debt”, have gotten a preferred type of payment.

With these loans, consumers enjoy the posh of buying and paying for them as they want, at zero interest or a low fixed rate of interest. According to .

While experts like Bankrate.com’s Senior Industry Analyst Ted Rossman imagine that avoiding interest is “not that big of a deal,” they imagine a lot of these loans create opportunities for overspending, late repayments and moving into trouble – symptoms that will become “phantom debt” or “phantom debt”. – says Rossman debt grows because these firms don’t report unpaid loans to credit bureaus, making it difficult for the lender to determine exactly how much debt the shopper actually owes. “You don’t necessarily need a great credit score to get one of these loans,” the analyst said.

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

These loans represent a hidden source of risk.

The Federal Reserve Bank of Kansas City conducted a study that exposed close 20% of BNPL customers were in arrears and 33% paid their bill inside a month actually borrowed funds from one other lender, which suggests more debt, Analysts also noted that rating agencies don’t know of ​​the debt amount and the extra $700 billion isn’t included.

In 2023, BNPL lending became increasingly popular amongst Black American shoppers, especially groceries. As grocery costs rose 8.4%, nearly half of Americans used installment loan apps, and about 1 in 5 of them used loans for groceries. However, the danger is higher for black and Latino users.

Black and Latino BNPL users have nearly 70% of their bank card debt and about $12,000 less in savings than those that don’t use the app for help. Regardless of the astonishing numbers, the industry continues to grow as a more flexible and consumer-friendly alternative to traditional bank cards. “Regardless of the type of purchase, BNPL is a healthier and more sustainable option compared to expensive credit cards that encourage minimum payments, keeping people in debt and exorbitant interest rates for longer,” a Klarna spokesperson said.

Experts say there are higher options for individuals who still want to go the BNPL route. PayPal will likely offer 4 equal, interest-free payments every two weeks. However, it’s best to read the fantastic print if consumers resolve to take out a loan.