How might using Klarna affect your finances?

More people are using Klarna than ever before and currently has over 90 million customers, 7 million of which are in the UK to make purchases in over 17 countries.

I’ve never used Klarna or any other business like them, but as someone that has an interest in personal finance, I wondered whether the use of them would or could in fact have an impact on your finances.

What is Klarna?

Klarna is one of many businesses that are now allowing customers to spread the cost of their purchases on many retailer websites so that you can get those things that you might be able to afford straight away.

Otherwise known as By Now Pay Later or BNPL.

Founded in 2005, it is already valued at $45.6bn after their latest funding round, compared to 2018 when it was valued at $2.5bn according to an article in the Guardian.

Where has this increase in demand for services like Klarna come from?

Klarna’s customer base and those businesses like Klarna are generally used by a younger audience that has grown up with being able to use the internet to make online purchases.

According to Klarna themselves, their average customer is 33 years old, but those between 40-54 are becoming their fastest demographic (source).

As more and more of us are shopping online, you can definitely see why their proposition on flexibility might be an attractive one for some.

Does Klarna leave a mark on your credit report?

Klarna offers a number of payment options, some of which don’t have any impact on your credit score and one that can have a negative impact on your credit score.

The two that initially don’t leave a mark on your credit file are the payment in 30 days option and the instalments option.

The option that does is the Finance options, Klarna carries out a hard search on your which leaves a mark, which means that other loan companies can see that you have made the application for credit, this could affect your ability to get a mortgage or other finance.

What you need to remember when using Klarna finance is that you are entering into a credit agreement and because of this they will carry out an affordability check which will leave a mark on your credit file.

Does paying Klarna help build your credit score?

You would think that being able to maintain your payments on time with Klarna would have an impact on your credit score, but unfortunately, it doesn’t as they don’t report your payments to the various credit reference agencies.

What happens if you don’t pay your bill?

If you miss payments not only will they stop you from being able to use them for further payment options, they will use Debt Collectors and notify the credit reference agencies of these missed payments if you are paying on their finance option.

Is there a positive way of using these services?

It might seem counterintuitive but the best way of using Klarna is only buying items that you already have the money for.

This means only using their 30-day option or their pay in three instalment option.

This way you can receive the goods without paying upfront.

Though I’ve indicated that this is a positive way of using Klarna, that doesn’t mean it is the right way and you should consider that if you have the money you pay for it using your debit card, or your credit card if you pay it in full when you receive your statement.

Why are people using Klarna?

With people feeling the pinch, there can be many reasons why there has been an increase in the use of BNLP services such as Klarna.

The first would be convenience, I see a lot of similarities with Klarna to Amazon in that it makes paying for something quite easy. You select what you want, select a payment option and that’s it, you don’t even have to leave the website.

Second, If you are unable to afford the big-ticket items that your home needs straight away, if your washing machine breaks down, for example, the option to pay over a period of time could be an attractive option, depending on the value of the item you might not be able to get a bank loan in any event.

What can you buy on buy now pay later?

I guess more to the point on this is what you can’t buy with Klarna, with the vast amount of businesses that currently use their payment services, you could buy anything from a box of chocolates to a washing machine.

Aren’t these doing what catalogues have been doing for years?

To a certain extent yes, with a couple of major differences, being the choice in payment and whether a hard search is carried out on your credit file.

When I was younger our family would get the Freemans catalogue and buy some of our products from there.

Freemans is still available, their payment service is called Flexiway, this enables you to spread the cost of your purchase but with a representative 39.9% APR Variable, whereas Klarna’s APR is 18.9% variable.

Why are businesses using the services of Klarna?

Klarna gives businesses the facility to offer their customers a way of paying for goods that they might not have used that retailer for in the past due to affordability as they are now able to spread the cost, this, in turn, increases their customer base all for what might be considered a small retailer fee on every purchase.

How Do Klarna made their money?

It seems too good to be true doesn’t it, you are getting your items from the retailer and they give you the option to pay for them later, which then begs the question of how does Klarna actually make its money.

The answer to this is that they make their money in a few ways.

If someone picks the 30-day or instalment option Klarna will make their money by charging that retailer a fee.
If you choose to pay using one of their finance options they make their money by not only charging the retailer a fee but also charging you interest on the money that you are paying back.

Are there any other companies like Klarna?

There are a number of other companies that offer flexible payment options like Klarna, the most popular or most well known being ClearPay and Laybuy, both of these offering different payment terms to that of Klarna.

Are there alternatives to using Klarna?

If you’re using Klarna to buy things that you want, rather than what you need, then budgeting for it is perfect.

A budget doesn’t have to be for boring stuff like bills.

Before you get paid, see if you’re able to budget for that little extravagance and enjoy your money.

Things can go wrong and for that reason, you’d need to look at starting an emergency fund.

You might also have items that you know that you want to replace periodically, a sinking fund is a perfect way of ensuring that you have money for them.

What are my final thoughts on Klarna and other BNPL companies?

Like any business where you are potentially affecting your financial circumstances negatively, Klarna and companies like them should be used with caution.

Exercising caution doesn’t mean that I think that they are bad, but you have to use them correctly and have a good idea of what you can afford to pay back every month, otherwise, you can quickly get yourself into trouble.

It’s important that if for whatever reason you aren’t able to pay your instalment you contact Klarna straight away to see if there is anything that they might be able to do for you without it having a huge impact on your credit file.