What is ‘ghost debt’? Buy now, pay later plans more popular than ever

Buy now, pay later plans and 'ghost debt'

A new form of debt looping a lot of Americans is being referred to as "ghost debt" or "phantom debt" – stemming from the popular buy now, pay later apps.

If you've ever wanted to spend thousands of dollars on a vacation or even buy a new iPhone but not pay for it all at once, a credit card was once your only option.

But now, buy-now-pay-later "loans" are growing in popularity.

These types of loans allow consumers to make a purchase and pay for it over time with no interest or a low fixed interest rate. Apps like Klarna, Afterpay and Affirm are the most popular, according to new data by Adobe Business.

The report reveals that this past holiday season, paying fixed interest rate installments hit an all-time high – up 14% over the past year.

"If you avoid interest, it's not that big of a deal. But I also think with all these things, it's possible to overspend and pay late and get into trouble," said Bankrate.com Senior Industry Analyst Ted Rossman.

But these loans do bring on another problem that financial experts call "phantom debt" or "ghost debt."

That’s because most of these companies don't report outstanding loans to credit bureaus, which makes it difficult for the lender to know how much debt a person actually has. These loans could be a hidden source of risk.

"You don't necessarily need a great credit score (to get one of these loans). If you're a little bit late, it's probably not going to hurt your credit because they usually don't report to credit bureaus, unless maybe you're so late that you go to collections," Rossman said.

That's why it's so popular, experts say.

Companies like PayPal may offer four equal interest-free payments, normally every two weeks. Experts say that's the better option.

But with any of these loans, a missed payment could incur a late fee, which could trigger a mountain of deferred interest.

So the best option is if you have to take a loan, read the fine print.