Maria Hazel Regalado, a 48-year-old mother of four in the Philippines, needed a computer last year so she could work from home. Regalado, who helps manage rental properties in Australia, didn’t have the cash or a credit card. A friend suggested she get a “buy now, pay later” (BNPL) loan from Billease, an online lender.

The computer cost 37,999 Philippine pesos ($664), almost as much as Regalado earns in a month. Still, Billease approved her application within minutes. She agreed to make 12 monthly payments of 4,493 pesos each, including principal and interest. The effective annual rate: 42 percent. “At first I was hesitant, but I didn’t have much choice,” says Regalado, who lives in southern Manila and had four instalments left as of mid-July. “I really needed that laptop.”

Lenders worldwide last year made $334 billion in BNPL loans, five times their value from five years before, according to technology analysis and consulting firm Juniper Research Ltd. In the US, merchants typically pay any fees, so customers get no-interest loans as long as they keep current. But the developing world has a different model: charging eye-­popping interest rates to cash-strapped borrowers.

While Indonesia, Malaysia and Thailand have been tightening regulation and warning consumers about the cost and risk of BNPL loans, companies such as Manila-based First Digital Finance Corp., which operates as Billease, say they’re opening up consumer finance in underserved markets. They’re attracting investors with a socially responsible tilt, such as private equity giant TPG Inc.’s The Rise Fund, one of Billease’s owners. Traditional lenders didn’t want to take on the risks of extending this kind of credit, says Georg Steiger, Billease’s chief executive officer and co-founder. “Early on, banks were not very comfortable with the type of collateral that we can offer, which is basically secured against a loan book,” he says.

So the booming $1.7 trillion private credit industry filled the gap. These lenders, which make loans outside both traditional banking and the world of publicly traded bonds, initially catered primarily to small and medium-size companies but have been expanding into consumer finance.

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Billease has tapped private debt investors including UK-based Lendable Inc., which has raised money from Shell Plc’s charitable foundation, development banks and investment firms catering to wealthy families. So have two of its biggest competitors, both based in Singapore: Kredivo Group Inc. has borrowed from money manager Janus Henderson Group’s Victory Park Capital Advisors, and Apaylater Financials Pte., which does business as Atome, has looked to the growing private credit operations of BlackRock Inc, the world’s largest money manager. The private credit companies typically lend out money to Southeast Asian BNPL outfits at annual rates of 10 percent to 15 percent, making the deals attractive to the companies’ investors.

In Jakarta, Indonesia’s capital, ads for the BNPL companies are almost inescapable both online and on billboards, city buses and commuter trains. One for Kredivo encourages customers to use BNPL loans for smaller daily purchases, even for train fares and items at convenience stores. “It’s that flexible!” the tagline reads.

Huy Pham, a senior finance lecturer at the Royal Melbourne Institute of Technology Vietnam who specializes in financial technology, says BNPL loans can lead to splurges from consumers with unstable incomes, exposing both them and their lenders to growing risks. “At the end of the day, if customers are not able to pay back the loans, then the platforms will be in trouble,” Pham says.

Indonesia’s BNPL-related debt in May reached almost $1.9 billion, up 40 percent from a year earlier. According to the country’s Financial Services Authority, 3.74 percent was ­nonperforming—meaning borrowers were more than 90 days behind on their ­payments—up from 3.22 percent a year earlier. “Consumers should assess their ability to repay the debt before using ‘pay later’ services,” says Agusman, the agency official who supervises financing, venture capital, microfinance and other financial institutions. (Like many Indonesians, he goes by only one name.)

The authority has been conducting financial literacy campaigns, aimed particularly at younger borrowers. It recently announced rules that will require individuals to be at least age 18 or married and have a minimum monthly income of 3 million rupiah ($184), just under Indonesia’s average, before they can take out BNPL loans. Last year the regulator capped maximum daily interest rates for online personal loans at 0.3% per day, which translates into an annualized rate of 109.5 percent.

BNPL loans can be controversial in Indonesia, a nation of 284 million that has the world’s largest population of Muslims, whose religion forbids the charging or paying of interest. The Indonesian Ulema Council, the nation’s top body of Islamic clerics, issued a legal opinion on online lending in 2021, saying the practice is “problematic.” It cited “usury practices with extremely high interest rates, borrowers failing to repay on time as agreed, and lenders threatening or even physically assaulting those who default.” Last year the government started requiring debt collectors to stick to certain scripts and visit debtors only during specified times.

A 2023 paper by business school professors in Indonesia and Malaysia concluded that consumers generally had positive views of the online short-term loans despite what the academics called unethical ­interest rates and aggressive debt collection practices. “People are borrowing beyond their means and buying things they cannot afford, because it’s so easy to get loans,” says ­co-author Sri Rahayu Hijrah Hati, a professor of marketing at the University of Indonesia.

BNPL lenders say they obey debt collection rules and the rates they charge reflect the risks of the population they’re serving. They say they don’t purport to be compliant with Muslim law and most banks in the country also collect interest on loans. Andy Tan, Atome’s chief commercial officer, says his company must contend with customers who disappear and erase their online presence, among other kinds of fraud. “Credit risk is something we monitor day in and day out,” he says.

Billease’s Steiger says his company’s borrowing cost is close to 20 percent after factoring in the midteens rates it pays on private debt, foreign currency hedges, withholding taxes and other expenses. At the same time, he says, Billease is flexible with clients who need more time to repay their debt. He adds that the company keeps collections in-house, recording conversations between borrowers and the company to prevent rude behavior, and refrains from charging more in late fees than the loan’s original principal.

Kredivo CEO Akshay Garg says his company approves less than a quarter of its loan applications and primarily targets middle- and upper-class borrowers who are likely to repay. “We’re just lending to people who should be getting credit cards,” he says. Kredivo sends payment reminders to borrowers through its app and in emails, Garg says, and individuals get to keep the items they bought even if they default because the debt is unsecured.

BNPL lenders are betting on customers like Alexandra Santos, a 31-year-old tech professional in Manila. In 2023 she wanted to tour the province of Albay, in the southeast of the Philippines’ Luzon island and famous for its cone-shaped Mayon volcano. She funded the holiday with a Billease loan of 8,200 pesos, payable in six installments of 1,552 pesos each over three months. That included total interest of about 1,112 pesos—an effective interest rate of 13 percent over the period, or 52 percent on an annualized basis.

Santos fully repaid the loan before its final due date and continues to borrow from Billease and other lenders. “In our culture, being in debt carries a stigma,” she says. “But in my view, it’s not really bad to have debt as long as you know your financial responsibilities.”

If she and most other customers can keep paying back their loans, the profit for Billease will be enormous. The company typically charges 3.5 percent a month on its loans, but it also turns the money it lends over many times a year. Steiger has estimated the expected annual return on this cash: 90 percent.