Private Credit’s New Obsession: Buy Now, Pay Later

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1:18So whether an AI agent supports a single user or your entire enterprise, with Okta, you'll turn risk into opportunity. Secure every agent. Secure any agent. Okta secures AI. Bloomberg Audio Studios. Podcasts. Radio. News. Buy Now Pay Later has taken the U.S. consumer market by storm in recent years, helping people break up payments for everything from computers to clothes to burritos. There's Affirm, there's Klarna, there's Afterpay, there's Sezzle, there's PayPal. J.J. McCorvey is a consumer protection reporter at Bloomberg. He's been following the rise of buy now, pay later since the mid-2010s and the so-called phantom debt that comes with it.

2:07A lot of those short term buy now, pay later loans are not always reported to credit bureaus. So, you know, something that analysts were telling us is that greater transparency was needed to kind of get a larger and fuller picture of a consumer's obligations. And I just never considered that there was like this larger machine kind of powering this industry until Renee and I kind of locked brains. Renee would be Bloomberg private credit reporter Renee Ismail. It's very similar to, you know, when you hear the term shadow banking, right? Shadow banking, a.k.a. private credit. These are lenders who operate like banks, but are less regulated.

2:54And now that industry is getting involved with buy now, pay later companies. In terms of the appeal for a private credit manager, these are ways that the private credit manager can get access to a steady, predictable stream of short term assets. Right. And for the Buy Now Pay Later firm, they love that because essentially they get to move risk off of their books. So the Buy Now Pay Later firm will originate the loans, bundle them up, and then sell that on to private credit managers. For private credit, it's an exciting place to be. Buy Now Pay Later is being used in more and more e-commerce sales in the U.S.

3:31Nearly 8 % of total online spending in the first four months of 2026 happened through Buy Now Pay Later programs in the U.S. totaling nearly$29 billion. Of course, the success of this partnership hinges on Americans' ability to repay these loans. And this is all coming at a time when U.S. consumers are increasingly under strain. We just, we don't know what happens in a downturn. You know, so currently U.S. households have a record$19 trillion in debt right now, According to last month's CPI, inflation outpaced Americans' paychecks. And, you know, there are signs that Buy Now Pay Later consumers are having some trouble keeping up with the loans.

4:23I'm Stacey Vanek-Smith, in for Sarah Holder and David Gurra. And this is The Big Take from Bloomberg News. Today on the show, two opaque corners of finance come together. What private credit's involvement in Buy Now, Pay Later means for consumers, why it's raising concerns, and whether some of the risks in this space could spill over into the rest of the economy.

4:49When consumer protection reporter J.J. McCorvey and private credit reporter Renee Ismail began working together on their private credit meets Buy Now, Pay Later story, things quickly got a little bit paranormal. So you wrote this story that is very much under the radar in the financial world right now. There are a lot of big stories going on. And I feel like this is the convergence of two things we've heard something about. One is private credit, which is often called shadow banking. The other one is buy now, pay later, which is sometimes called phantom debt. So essentially, you decided to report a story on shadow phantoms.

5:33This is how I've come to think of it. These are two kind of esoteric worlds for people who may at least have heard the term but may not be familiar with it. What exactly is Buy Now, Pay Later? So Buy Now, Pay Later is a flexible payment option that allows shoppers to take bigger ticket purchases and break them down into smaller bite-sized payments that could be made over time. And as far as I understand it, you don't pay interest. You can just split up the payment. Instead of paying$100, you can just split it up into four payments of$25 spread over six months. And it's not like a credit card where I would end up paying more.

6:11Some buy-in-upilator companies offer the option to split your payments from six to eight weeks. And then there's like longer-term financing, which Affirm was kind of one of the early players in this space. And now you see Klarna expanding further into longer-term purchases. And those usually come with interest. How long have these companies been operating? I think I first started hearing about Buy Not Pay Later in like the mid-2010s. And, you know, then you had competitors kind of popping up over time, people embracing it at a faster rate, especially during the pandemic. I think, you know, a lot of us were at home, you know, looking for ways to spend all this extra money that we had.

6:59And, you know, ta-da, here are more options for you to spread the word over time. America delivered. Yes, as it does. Okay, so credit cards, I understand how they make money. That's really clear. If I pay$25 out of my$100, then they charge interest on the rest as I slowly pay it off. Buy now, pay later, how do they make money? How do these companies actually turn a profit? Typically, that involves merchant fees. So retailers really love buy not pay later because it encourages repeat spending and it kind of gives you that extra nudge. You know, when you're you might have something sitting in your Amazon cart and maybe you don't want all that money to come out of your checking account at once.

7:43And so if there's a button that lets you say, you know, break it up into three or four payments across three or four months, even you might be a little more likely to hit that buy button. You know, from a retailer standpoint, when you give shoppers the breathing room that comes with Buy Now, Pay Later services, it's just going to encourage more traffic, right? More people coming into the door at the end of the day. The hallmark use of Buy and I Pay Later, at least as it started, financing these big purchases. And I think over the past couple of years, what you've seen is this gradual kind of push into groceries and essentials as in our story with our subject, Verdell Wright, who lost his job last year and is now using Buy and I Pay Later to kind of make ends meet.

8:31So he's buying groceries from Aldi and he's also buying a toothbrush and pre-workout supplement and bathroom cleaner on Amazon. And I think our reporting shows that that's not necessarily by accident. What do you mean? Well, I think if you look at some of the largest deals between private credit and buy-and-pay-lator companies to purchase some of these buy-and-pay-lator loans, even they say in the press releases, right? So, Klarna makes a deal with the private credit firm Elliott, right, Renee? And they say, this will help us expand our longer-term loans to U.S. consumers to meet their accelerating demands.

9:16So the expansion of buy-not-pay-later companies into these more essential everyday products, I think, is kind of pushed via private credit money. What is private credit exactly, for people who don't know? Yeah, you could think of private credit as non-bank lending. Typically, these come from credit managers, and they extend usually longer-term loans to middle-market companies that may not be able to take out loans from banks. Why wouldn't they be able to take out a loan from a bank? For a myriad of reasons. They could have a riskier credit profile. They may need a more bespoke type of arrangement, which banks, because they're heavily regulated, may not be able to meet.

10:00Whereas a private credit manager who may have a bit looser regulations as it relates to what they can extend out to companies, they might be able to make it happen. So it sort of seems like buy now, pay later. You don't necessarily have to deal with how good your credit score is the way that you might if you get a credit card. So it kind of is a way that people who maybe don't have the best credit score to get credit. And private banking, shadow banking, also seems like a way for companies that also might not have the best credit or might be maybe wanting to take out riskier loans for something that is maybe a little riskier.

10:39it seems like a way that they can get money. So this seems like two services that are a little bit similar in that way. Is that right? Yeah, definitely. I mean, in terms of the appeal for a private credit manager, you know, take the forward flows. These are ways that the private credit manager can get access to a steady, predictable stream of short-term assets, which is sort of outside of the realm of the typical longer-term debt that might sit on their books. Okay. What is a forward flow? Because this is sort of key to this alliance between shadow banking and phantom debt. It's all about the forward flows.

11:16So what does that mean? With a forward flow, as I mentioned, this is something that allows the private credit manager to take on debt that's being originated by the buy now pay later firm. And for the buy now pay later firm, they love that because essentially they get to move risk off of their books. So is it like lending somebody money before they need it, kind of? Is that the forward flow? Is that they're like, just FYI, we have$1 ,000 available for loans that you can take as you want? Yeah. I mean, think of it from the buy now, pay later firm's perspective. Rather than them waiting for payments to come back in so that they can get capital and extend more loans, they have willing buyers on the private credit side that say, hey, we'll give you that capital.

11:59You focus on what you're good at. you focus on extending those loans on helping everyday consumers make these purchases happen. As private credit enables buy now, pay later firms to take on more loans, more and more transactions are happening at the intersection of these two industries. And both of them involve more risk and less regulation than traditional lending. That has critics concerned. We look at what could happen after the break.

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14:35So private credit, aka shadow banking, is supercharging buy now pay later loans, aka phantom debt. And it's happening at a time when the U.S. consumers responsible for repaying those debts are increasingly under strain. I asked Bloomberg's J.J. McCorvey and Rene Ismail to unpack the potential risks. You could think about the problems on several levels. Obviously, you have the scale component because the originators know that they have these, you know, billion dollar, three billion dollar, five billion dollar facilities coming from the private credit managers. they essentially can just kind of extend these loans and that might incentivize them to be more like machines where they get a little careless.

15:20Exactly. Exactly. And, you know, I think a second layer is the cyclicality. Right. Like I mentioned, during the good times, it's very easy for private credit managers to continue doing deals like these. But what happens when conditions get a bit choppier? What happens when private credit may not want to expand on some of these deals? Will they pull back? Will they terminate some of these agreements? And I think at the end of the day, the person who feels that is the person who is shopping for groceries that might not be able to get that flexible payment solution that they are so used to. You know, to Renee's point, we just we don't know what happens in a downturn.

15:58Currently, U.S. households have a record$19 trillion in debt right now. According to last month's CPI, inflation outpaced Americans' paychecks. And there are signs that buy-not-pay-later consumers are having some trouble keeping up with the loans. And the buy-not-pay-later companies themselves will say, you know, delinquency rates are low. But when you look at certain surveys, for example, a couple of months ago, LendingTree came out with a survey that we covered that said 47 percent of borrowers had paid late on a buy not pay later loan within the last year, which was up six percentage points from last year.

16:42That's a lot. 13 percentage points from two years ago, and that more than half of them said they would not be able to make ends meet without the loan. So that just gives you a sense of how much some parts of the consumer economic picture are struggling in the economy, but also how much they have come to rely on buy, not pay later. And so the concern is what happens? You know, will that new line of credit dry up for these consumers? Will there be potentially heightened costs and fees associated with the loans, which will compound the strain? So, yeah, I think that's just a lot that we don't know.

17:22And the folks we've talked to are kind of just saying we're keeping an eye on this. All right. Well, I'm going to say something that may be a little bit at the heart of your story. But that sounds a lot to me like the thing that caused the financial crisis, right? Like a bunch of loans getting packaged together and divided up and sold off. Is that what's going on here? So I think in terms of the parallel, there are connections, right? You mentioned the fact that they're originating and then bundling it up and then moving it on to willing buyers, willing investors. That part is definitely similar.

17:59I think what's different, though, is scale, right? When you look at the lead up to 2008, I mean, that was a$10 to$11 trillion mortgage market. The buy now pay later space is only about half a trillion, right? So in terms of greater spillover effect or contagion in terms of the broader economy, definitely two different scenarios here. And I would add that the buy now pay later companies would say these loans are very different, right? They're short-term purchases. It's not over multiple years. it's usually the average purchase is anywhere from$100 to$300 versus$300 ,000. And so there's a predictability that private credit investors see safety in.

18:48These are people with established repayment histories. Even if every few months they miss a payment, at least that's something you can plan for and expect. And so, yeah, it's a different ballgame, but skeptics see a lot of similarities in the practice of what's happening with forward flow and what led up to the crisis, for sure. There's a lot we don't know about these worlds. How does that play into the possible risk here? Yeah, I mean, I think as it relates to forward flows, for example, there are typically a lot of guardrails that they can work into these really large deals. But these are private deals at the end of the day.

19:33So we don't even get to see into these structural protections that might be baked into the forward flows. But you like to think that managers and originators sort of work together to set these forward flows up in a way that protects both the originator extending the loans and also the funding partner, in this case, private credit managers. That's a lot of faith, though, that people are being responsible, which historically speaking is a little hit or miss. Yeah. I mean, when we spoke to managers, they were very adamant about the strength of these protections that they put into these forward flows.

20:11I mean, some of the ones that come to mind, oftentimes before they even ink these partnerships, they'll have eligibility criteria where they will say, we will agree to purchase only loans that fit under a predetermined credit profile. And also, you know, sometimes they can even co-invest, right? Like they can bring another asset manager to come in and invest with them in the buy now, pay later loans or personal loans or auto loans or student loans or whatever it is. And what that does is it shares the risk, but it also shares the due diligence process. What are some of the warning signs that you will both be watching for?

20:50Like, what are some red flags that if you saw them, you would start to worry about the shadow phantoms? I think from my world, I would say, you know, how managers are, you know, handling all the concerns that you've probably seen in the headlines, how they're handling investors that want to pull money out. how AI could disrupt certain business models that they might be exposed to. And even though a lot of these consumer type plays are really only a small part of their portfolios, the health of the space is going to be something to watch. I don't know if it's a warning sign or something that it started out as a service for couches and laptops and is now funding like burritos.

21:39Do you see that as a warning sign at all? Well, yes and no. I mean, I think it is staggering when you see a statistic like one in four BNPL users use the product for groceries. That's according to a survey last year. But, you know, when you talk to the credit managers, they might, you know, sort of come back and say, well, it's really no different from using a credit card. I buy groceries on my credit card all the time. It's not because I couldn't afford it. Exactly. I think another important piece of context to this entire conversation is the fact that this presidential administration has been very quick to dismantle certain consumer protections.

22:24There's the Consumer Financial Protection Bureau, which previously had oversight of the binocular space. And under the Biden administration, the CSPB issued an interpretive rule to try to make ban and appeal later companies beholden to the same rules as credit card companies when it comes to interest disclosures, formalized practices for disputes and repayments and things like that. And we saw when the Trump administration took over, they revoked that. So and according to our recent report by our investigations team, you know, we see just how friendly to industry the CFPB has now become. And so if the agency that, you know, was primarily watching this has telegraphed that maybe it's not so concerned with watching it, you know, that closely, who is going to sound the alarm if things start to break down?

23:35This is The Big Take from Bloomberg News. I'm Stacey Vanek-Smith, in for Sarah Holder and David Gura. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. And thank you for listening. We'll be back tomorrow.

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