Economists have expressed concern that the “buy now, pay later” loans that helped fuel the record-setting holiday retail season could exacerbate the financial well-being of Americans, the New York Times reported.
These pay-later loans, which allow consumers to make large purchases in installments and often interest-free, have grown in popularity due to increased prices, rising credit card debt, and higher interest rates.
However, the loans could be encouraging lower-income and younger Americans to take on too much debt, and because pay-later loans aren’t regularly reported to credit bureaus, this could be masking a source of risk to the US financial system.
Wells Fargo economist Tim Quinlan, who recently published a report describing the pay-later loans as “phantom debt,” told the New York Times that the more he researches these loans, “the more concerned I am.
While traditional consumer credit measures suggest that Americans’ household finances are relatively healthy, Quinlan said if those measures “are missing the fastest-growing piece of the market,” namely pay-later loans, then they “aren’t worth a darn.”
It is unclear how large the pay-later market might be. However, Quinlan estimated that the spending through these loan options for 2023 is somewhere in the neighborhood of $46 billion.
While that is a small piece of the market compared to the $3 trillion Americans put on credit cards in the past year, such loans, offered by companies like Affirm, Afterpay, Klarna, and PayPal, have been increasing quickly at a time when some Americans’ finances are showing early signs of strain.
Currently, credit card borrowing in dollars is at a record high and delinquencies are on the rise. This is already causing strain, particularly among younger adults ages 20 to 30 who are by far pay-later loans’ biggest users.
In what could either be a sign of financial problems or the cause of it, young people may be turning to pay-later loans only after maxing out their credit cards.