How Affordability Has Shifted

Flexible payment plans are changing how people buy things, shifting focus from the total cost to just the monthly payment. Easy access through digital finance tools creates a tricky situation where things seem affordable but can lead to hidden long-term financial risks. Financing everyday items, not just big purchases, means looking beyond the monthly bill is crucial.

Monthly installment (EMI) and Buy Now, Pay Later (BNPL) offers have changed how consumers think about buying power. The large upfront payment barrier is gone, often making people focus on the monthly bill instead of the total price. This means buyers might overlook longer repayment periods and higher total costs for an easily managed monthly figure. The question becomes less "Do I need this?" and more "Can I afford this monthly payment?" This has fueled spending on big items and daily needs alike, with BNPL growing rapidly for groceries and clothes. Retailers use this to offer premium items people might not otherwise buy.

The Real Cost of 'No-Cost' EMI

Despite marketing that claims "zero-interest," consumers often pay more than the cash price. This happens because prices are sometimes inflated, or discounts for paying upfront are lost when choosing an EMI plan. Added fees like processing charges and Goods and Services Tax (GST) on those fees, plus documentation costs, can add up even if they seem small individually. Some special offers can even lead to retroactive interest if the balance isn't paid off within the promotion period. The Reserve Bank of India has noted that "no-cost" EMI is often misleading, as costs are hidden by banks or merchants.

Growing Debt and Credit Blind Spots

The easy availability of these payment plans, especially BNPL, has contributed to rising consumer debt. In the US, total consumer debt passed $18 trillion by November 2025. A major issue is "phantom debt," where people can take out multiple BNPL loans across different companies without them showing up clearly on regular credit reports. This lack of clear credit reporting has raised concerns about lending practices and financial stability. For example, over 60% of BNPL users have multiple loans. This can affect their ability to borrow later, as lenders might see them as over-leveraged, even if they pay on time.

Credit Scoring Adapts to New Debt

Credit bureaus and scoring companies are changing how they assess risk due to the rise and hidden nature of BNPL. Starting in Fall 2025, FICO introduced new models (FICO® Score 10 BNPL and FICO® Score 10 T BNPL) that include BNPL loan data in credit scores for the first time. This aims to give a fuller picture of a consumer's financial behavior, making hidden debts more visible and potentially affecting creditworthiness. For lenders, this means a more complete, though complex, view of borrower risk. Fintech firms are also using other data, like BNPL repayment history, to make better lending decisions.

Systemic Risks of Hidden Debt

The widespread use of EMI and BNPL schemes creates broad financial risks. For consumers, the main danger is becoming over-indebted from impulse buys and underestimating total borrowing costs. This can lead to missed payments, hurting credit scores and triggering late fees that increase costs significantly. For financial institutions, the challenge is correctly judging borrower risk when much of a consumer's debt isn't fully visible on traditional reports. While some research suggests BNPL users pay back loans well, possibly due to better terms or learning from past payments, the overall effect of widespread hidden debt on financial stability is still a concern. The European Union has acknowledged these risks, applying new rules to BNPL services to tackle hidden fees and potential over-indebtedness.

The Future of Consumer Credit

The consumer credit market, especially BNPL, is set for continued rapid growth, driven by digitalization and rising middle classes in many regions. The global consumer credit market is expected to reach USD 17.6 Billion by 2034, with BNPL projected to grow at about 25% annually. Regulators are paying closer attention to these products to improve transparency and protect consumers. As financial technology evolves, lenders and consumers must balance the ease of flexible payments with the need for sound financial management and risk assessment.