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Buy Now, Pay Later (Part 1)

In recent years, the financial landscape has witnessed a surge in the popularity of “buy now, pay later” loans, offering consumers a convenient and interest-free method to make purchases ranging from everyday items to luxury goods. However, the lack of reporting of these loans on credit reports has raised concerns about the potential for consumers to accumulate significant debt without it being visible to lenders and regulators. While Apple’s recent decision to report loans from its Apple Pay Later program to Experian seemed like a significant step towards addressing this issue, it has yet to be replicated by other major pay-later providers.

These loans, characterized by their installment-based repayment plans over a short period, gained traction during the pandemic-induced online shopping boom. Despite their popularity, economists and consumer advocates have warned about the risks associated with what they term “phantom debt.” This term refers to debt that does not appear on credit reports but could still pose financial challenges for consumers and the broader economy.

The major credit bureaus argue that integrating pay-later loans into the reporting system would benefit both consumers and lenders. By incorporating timely repayments into credit reports, consumers could build credit, while lenders could gain a more comprehensive understanding of borrowers’ financial behavior. However, challenges remain in adapting existing credit reporting systems to accommodate the unique characteristics of pay-later loans, including their frequency and short-term nature.

The pay-later industry has expressed concerns that traditional credit reporting systems may not be equipped to handle their loan structures effectively. Existing scoring models tend to penalize borrowers who take out multiple loans in quick succession, potentially disadvantaging pay-later users. Moreover, the monthly reporting cycle of credit bureaus contrasts with the biweekly payment schedule typical of pay-later loans, further complicating integration efforts.

Despite these challenges, there is a growing recognition within the industry that pay-later loans are unlikely to remain outside the credit scoring system indefinitely. Whether driven by market forces or regulatory mandates, there is an expectation that pay-later providers will eventually need to report loan data to credit bureaus to ensure responsible lending practices and consumer financial well-being.

Preview of Article 2: While the debate over integrating pay-later loans into traditional credit reporting systems continues, some pay-later providers are exploring alternative approaches to credit reporting. These initiatives aim to address the shortcomings of existing systems and offer more tailored solutions for the unique needs of the pay-later industry.