Buy Now, Pay Later: The Phantom Debt Wall Street Can’t Track

Private credit firms are increasingly betting on consumer debt—including subprime lending and Buy Now, Pay Later (BNPL) loans—as a high-yield asset class, even as regulators and credit rating agencies warn of growing risks of "phantom debt" slipping through Wall Street’s traditional tracking systems.

According to a June 2026 analysis by S&P Global Ratings, nonbank lenders have originated over $400 billion in consumer credit since 2023, with BNPL and private credit vehicles accounting for nearly 40% of that total. The surge comes as banks tighten lending standards, pushing borrowers toward alternative lenders that operate outside regulatory oversight.

Why are private credit firms targeting consumer debt?

Private credit funds, which raised $1.1 trillion globally in 2025, are increasingly allocating capital to consumer loans—particularly in BNPL, student debt refinancing, and subprime auto financing—where yields exceed traditional corporate debt. "These loans are structured as variable interest entities, meaning they don’t always appear on borrowers’ credit reports or in Wall Street’s risk models," said a senior analyst at Moody’s Investors Service, who noted that delinquency rates for BNPL loans rose 18% year-over-year in the first quarter of 2026.

The shift reflects a broader trend: nonbank lenders now hold nearly 30% of U.S. consumer debt, up from 15% in 2019, per Federal Reserve data. Unlike traditional banks, these firms often lack the same underwriting scrutiny, leading to concerns about "phantom debt"—loans that don’t trigger standard credit checks or appear in risk-assessment tools used by agencies like Fitch Ratings.

How does "phantom debt" evade Wall Street’s tracking?

Unlike mortgages or credit cards, many BNPL and private credit loans are issued through partnerships with retailers or fintech platforms, bypassing the three major credit bureaus (Experian, Equifax, and TransUnion). A 2026 report by the Consumer Financial Protection Bureau (CFPB) found that 62% of BNPL borrowers with subprime scores had no record of these loans on their credit files, leaving lenders and investors blind to repayment risks.

"When a borrower defaults on a $500 BNPL loan, it doesn’t show up in the same way as a missed credit card payment," said a CFPB official in a briefing. "This creates a false sense of security for investors who assume these loans are low-risk."

The opacity extends to securitization markets. While banks must comply with Basel III capital rules for consumer loans, private credit funds often structure deals as "asset-backed securities" with lighter disclosure requirements. A June 2026 SEC filing by a major private credit firm revealed that 37% of its consumer loan portfolio was held off-balance-sheet, meaning it didn’t appear in traditional risk assessments.

What are the risks for investors and borrowers?

Regulators and credit rating agencies are sounding alarms. S&P Global downgraded 12 private credit funds in 2025 after finding that delinquency rates on BNPL and subprime auto loans exceeded underwriting models by 25%. Meanwhile, the CFPB has launched probes into four BNPL providers for allegedly misleading borrowers about interest rates and repayment terms.

Borrowers face their own risks. A 2026 study by the Urban Institute found that households using BNPL services had a 43% higher likelihood of falling into debt spirals, defined as taking on new loans to repay existing ones. "The lack of transparency means borrowers don’t realize how much they’re paying in fees until it’s too late," said the study’s lead author.

What happens next?

Industry players say regulatory pressure is mounting. The CFPB is expected to propose rules later this year requiring BNPL lenders to report loans to credit bureaus, while the SEC is reviewing whether private credit funds must disclose more about their consumer loan exposures. Meanwhile, institutional investors are growing cautious: BlackRock’s private credit arm reduced its consumer loan allocations by 15% in the first half of 2026, citing "elevated risk premiums."

For now, the bet on consumer debt continues—driven by yields that outpace traditional fixed-income assets. But with delinquencies rising and regulators tightening scrutiny, the question remains: How long before "phantom debt" becomes a full-blown crisis?