Credit Risk on the Rise: Unreported 'Buy Now, Pay Later' Loans Pose Challenges for Holiday Shoppers

Credit risk Buy Now Pay Later Unreported loans Holiday shoppers Short-term installment loans

By E.Baloyo , Parent Herald Nov 23, 05:21 am

Photo: (Photo : Stephen Chernin /Getty Images)

As the holiday season approaches, an increasing number of consumers are turning to Buy Now, Pay Later (BNPL) payment plans, signaling a potential surge in credit risk.

Unreported loans associated with this popular shopping trend are now posing challenges for holiday shoppers, raising concerns among credit experts.

The latest data paints a vivid picture of the surge in Buy Now, Pay Later usage, with short-term installment loans driving online spending to a staggering $6.4 billion in October alone.

As holiday shoppers gear up for the festive season, the projected spending is expected to peak at $9.3 billion in November, with a particular highlight on Cyber Monday, which anticipates a single-day record of $782 million.

Holiday Shoppers Attracted to BNPL, But at What Cost?

This surge in BNPL usage, while beneficial for retailers, is not without its challenges. Credit risk experts are sounding the alarm as the popularity of unreported loans associated with these plans continues to grow.

The appeal lies in consumer-friendly interest rates, enticing holiday shoppers to make initial payments at checkout and complete the rest in installments over the coming weeks.

The allure of Buy Now, Pay Later options extends to a diverse demographic, with younger consumers and those facing difficulty accessing traditional credit finding these plans particularly appealing.

For holiday shoppers juggling multiple financial responsibilities, such as student loans and credit card debt, the flexibility of BNPL can be an attractive solution.

However, credit experts warn that key features of these plans, including the lack of credit reporting to major bureaus, can make borrowing too easy and lead to excessive debt.

While these short-term installment loans provide a sense of financial inclusion, the unreported nature of the loans is raising concerns.

Customers appreciate that these loans don't impact their credit scores, but experts worry about the potential for "loan-stacking," wherein individuals accumulate debt with multiple lenders, a risk amplified by the absence of comprehensive reporting.

Credit Risk Challenges: The Underreported Side of BNPL

A significant drawback of Buy Now, Pay Later plans is the underreporting of most loans to the three main credit bureaus.

This, according to credit risk analysts, presents a considerable challenge for lenders as they navigate the underwriting process.

The opacity of the BNPL space, combined with the increasing number of companies offering these loans, compounds the risk for both consumers and lenders alike.

Kevin King, vice president of credit risk at LexisNexis Risk Solutions, emphasized the underwriting challenge, stating, "Right now, it's really tough for BNPL lenders to know that a customer may have taken out a loan from four other BNPL lenders earlier this week."

The lack of a centralized reporting system can potentially trap consumers in a cycle of accumulating debt with multiple lenders, contributing to the overall credit risk.

Navigating the Future: Holiday Shoppers Grapple with BNPL Uncertainties

As holiday shoppers eagerly embrace Buy Now, Pay Later options to manage their budgets during this festive season, the lingering question remains - at what cost?

For individuals like Demishia Alford from Greensboro, North Carolina, who relies on short-term loans for household goods, clothes, and holiday gifts, the prospect of unreported loans poses uncertainties about credit-worthiness.

The increasing prevalence of BNPL and its associated credit risks underscore the need for a balanced approach.

While these payment plans offer convenience and financial flexibility, consumers and credit experts alike are navigating a landscape where unreported loans bring both benefits and potential pitfalls.

As the holiday shopping season unfolds, the challenge is clear - finding a middle ground that accommodates consumer needs without compromising financial stability.