Some types of debt can track you.
Buy now, pay later loans in particular can be difficult to track, making it easier for more consumers to get over their heads, some experts say — even more than credit cards, which are easier to bill despite their high costs. high interest rates.
According to Adobe's latest online shopping data, installment usage reached an all-time high over the holidays with a 14% increase year-over-year.
Buy now, pay later is now one of the fastest-growing categories in consumer finance, according to a separate report from Wells Fargo.
“With no central registry for monitoring, the growth of this 'phantom debt' could mean that total household debt is actually higher than by traditional measures,” said Tim Quinlan, senior economist at Wells Fargo and co-author of the report.
Because buy now, pay later loans are not currently reported to major credit bureaus, it is challenging for a lender to know how many loans a consumer has outstanding, Quinlan said.
“It's hard to know how much of this debt is out there,” said Ted Rossman, senior industry analyst at Bankrate. “It’s this kind of shadow guilt 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 with shoppers.
“If credit card interest rates are over 20%, a BNPL [buy now, pay later loan] “allows consumers to access capital without increased costs,” Quinlan said.
“We have a business model that is perfect for uncertain times,” Affirm co-founder and CEO Max Levchin said recently on CNBC’s “Squawk on the Street.”
However, managing multiple buy now, pay later loans with different payment dates can also be challenging, Quinlan added.
“BNPL could lead to an increase in consumer debt as consumers may be more likely to take on additional debt if they know they can spread out the payments,” he said. “You can bury yourself in low monthly payments.”
While typical terms break a purchase into four equal interest-free payments, not all buy now, pay later loans work this way.
“Many of these plans are longer-term and even charge interest; I find that very ironic,” Rossman said. “It feels more and more like a credit card – that can get people into trouble.”
In addition, depending on the lender, there may be late payment interest, deferral interest, or other penalties if a consumer misses a payment.
Separate studies have also shown that installment purchases could lead consumers to spend more than they can afford on impulse purchases.
““That can lead to debt problems,” Quinlan said.
Buy now, pay later products are not subject to the same regulations as credit cards, meaning there may be fewer protections for consumers, Quinlan said.
“Even more worrying is that BNPL is doing this in de facto stealth mode, remaining largely hidden from both regulators and policymakers,” Quinlan said.
Meanwhile, the Consumer Financial Protection Bureau has launched an investigation into buy-now-pay-later lenders.
The CFPB said it is particularly concerned about the lack of clear disclosures about loan terms and conditions, as well as how these programs affect consumer debt accumulation, which consumer protection laws apply and how payment processors collect data.
“Until there is a final measure on this, there is no telling when this phantom debt might cause problems for the consumer and the broader economy,” Quinlan said.
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