Many Americans are buried in debt — with the burden growing more dire amid lingering inflation. Credit card debt is the most insidious, and tops a trillion dollars in the U.S., according to the Federal Reserve. You may think you’re in the know of exactly how much you owe, but are you really?
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Phantom debt associated with buy now, pay later (BNPL) programs is on the rise. What is this debt? What makes it so toxic? And why is it haunting more and more consumers?
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BNPL Phantom Debt Largely Stems From Consumer Misunderstanding
Traditionally, the term “phantom debt” means a debt that doesn’t exist or one that has been paid off but still lingers or that has been intentionally and artificially inflated, Kyle Enright, president of Achieve Lending explained.
But this term is also associated with BNPL debt and may point largely to consumer confusion.
“People may use the word ‘phantom’ with BNPL because of the common definition of the word — ghost, something not really there — and because they do not realize that BNPL is indeed a loan and that they’re taking on debt,” Enright said. “It might make sense except for the fact that, per above, “phantom debt” is a specific financial term referring to something else.”
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BNPL Programs Can Attract Fraudsters Who Prey on You
A big problem associated with BNPL “phantom debt” that more closely aligns with the origin of the phrase is the fact that it can invite synthetic identity fraud.
“This is when fraudsters use a combination of legitimate but unconnected pieces of personally identifiable information (PII) to fabricate a person or entity and use it to apply for credit with a low bar to entry, like BNPL,” said Cecilia Seiden, VP of market strategy at TransUnion. “Banks tend to be looser in their vetting processes for a starter card and, finding the individual components to be legit, are more likely to approve the borrower.”
Fraudsters are skilled at exploiting gaps in identity verification solutions and processes and, Seiden said, “since these schemes become much more difficult to detect once a synthetic identity is established and begins to build credit, institutions often have no idea what their level of exposure is.
“Further, any associated losses are often misunderstood. An institution may handle it as a credit risk problem, potentially leading to wasted collections efforts and, with enough frequency, an unnecessary overhaul of credit risk strategies or some other credit loss, customer experience or operational issue.”
Why Shoppers Racked Up $16.6 Billion of BNPL Debt Over the Holidays
The amount of consumers embracing BNPL is staggering — and that’s a big reason phantom debt is on the rise. According to Adobe Analytics, over the 2023 holiday season alone, Americans collectively racked up $16.6 billion in BNPL purchases. This represents a significant growth spurt in BNPL phantom debt; over the course of 2023, BNPL spending spiked about 14% — bringing the total amount of BNPL spending to $75 billion.
What is driving the surge in BNPL usage?
“One [reason] is simply that it’s convenient and seems to offer consumers a way to pay for something they want to buy when they know they don’t have all the money they need to pay for it right now,” Enright said. “The offer to pay with a BNPL service often doesn’t happen until the consumer gets to the physical or online checkout; so, unless someone has a clear plan for what they’re going to buy and how they’re going to pay for it when they are shopping, it can be all too easy to decide at the last minute to use BNPL.”
Consumers May Not Know That BNPL Programs Create Debt
Most problematically, when it comes to BNPL phantom debt, is that consumers simply may not know it’s not just a phantom; it’s real and they owe. ASAP.
“Many consumers don’t realize BNPL is a loan; it’s adding debt,” Enright said. “Seeing ‘interest free’ can serve as an enticement. Most consumers using BNPL don’t realize the specific and exacting schedule of payments to remain ‘interest free,’ especially as payments are generally due every two weeks. Combine that with keeping track of all their other monthly bills, and it quickly becomes a convoluted payment schedule.”
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This article originally appeared on GOBankingRates.com: What Is BNPL ‘Phantom Debt’ and Why Is It On the Rise?