Buy now, pay later options are becoming more accessible to consumers. A quarter of Americans surveyed in April 2024 said they used buy now, pay later services in the past 12 months, according to a recent report from NerdWallet.

The number of buy now, pay later loans increased nearly 1,100% between 2019 and 2021, according to data compiled by the Consumer Financial Protection Bureau.

The rapid growth has some analysts concerned because where there are loans, there is debt — but exactly how much debt is still unclear.

A December 2023 report from Wells Fargo concluded that the "Buy Now, Pay Later market may be small now, but if we don't know how fast it's growing, it logically follows that we simply cannot know when it will be a problem."

"We've often referred to this as phantom debt, where it's sort of flying under the radar and not really something that anybody has a good grasp on," Shannon Grein, one of the authors of the December note, told CNBC.

"The notion of this phantom debt being out there is just not true," said Penny Lee, president and CEO of the Financial Technology Association, or FTA. The FTA is a trade group that represents four of the largest buy now, pay later providers: Klarna, Afterpay, Zip and PayPal. "We know from publicly reported information how many folks are taking out loans and how many of them default. And it's a very, very low number."

Grein emphasizes that she does not think the debt is so bad that it will explode, but rather the concern is around not being able to track how much is out there and how many consumers are behind on payments.

"I think the biggest challenge and first thing that really needs to come to fruition is some sort of monitoring of its size," she said. "And then we can really understand if it is a challenge or something that's a concern for the consumer under the surface."

The consequences of unmonitored debt

There is currently no way for economists, regulators and analysts to know how rapidly buy now, pay later loan debt is growing, which could lead to unforeseen economic consequences. 

"In order to fully or accurately assess the health of the financial sector, you have to accurately understand how much of a debt burden is out there and how that's manageable against the income side for households generally," said Grein.

Buy now, pay later companies generally do not report information to the major credit bureaus, which means they typically are not reflected in people's credit scores.

"I think you have regulators are trying to regulate this segment similar to credit card debt, even though it's not equivalent, just to … wrap their hands around it and have it monitored, so that it isn't an area of financial instability from a household debt perspective," Grein said. "If someone falls delinquent on one of these loans, it will show up in a bankruptcy report, but that's the only way it shows up on a consumer profile."

The reason buy now, pay later is not an apples-to-apples comparison to a credit card is because the loans are tied to one specific purchase rather than opening a longer-term, revolving line of credit.

"Every time you take out a buy now, pay later loan, it looks like you've maxed out your credit," Lee said. "So unfortunately, it's scored as a negative. So we believe that these products are consumer friendly. We believe they should enhance consumer scores, their credit history and their scoring. … [The industry has] been actively working with the credit rating agencies to be able to think through how to modernize their own scoring, to be able to capture that better. But that's still a little ways away. They're just not there yet."

Watch the video above to learn more about why phantom debt is looming over U.S. consumers and the economy.