Klarna has grown rapidly over the past few years with many of the most popular shops offering this as a payment method. Klarna is a buy now, pay later scheme that allows people to decide to pay 30 days later, split the payment over multiple instalments or finance the full purchase.
Yes, Klarna is safe to use as a payment processor, however, it can negatively affect your credit score depending on which service you choose.
In this Klarna review I’ll go over the most common questions and concerns, such as is Klarna safe, how it affects your credit score and when you should and shouldn’t use it.
How Does Klarna Work?
Klarna has partnered with over 5,000 merchants in the UK, giving customers the option to buy goods or services now and pay for them later. Klarna then makes its money by charging a percentage of the purchase price to the retailer, allowing them to offer this service for free to the end customer.
I’ll go through each of the products Klarna offers below.
Klarna Pay in 30 Days
This option is quite self-explanatory, you can buy goods or services up to your given credit limit and then after 30 days you have to pay the balance in full with no additional charges for the service.
This can be helpful if you’re wanting to buy multiple products to try without needing to have all the money readily available, as you’ll just have to pay for the final balance minus any returns at the end of the 30 days.
Klarna Pay in 3
As the name suggests, this option allows you to split a purchase into three equal instalments. This service is particularly useful if you have a large purchase you are wanting to spread over a longer time horizon.
The first instalment is taken when the retailer confirms the item has been shipped, often within a day of purchase. The next payment is taken at 30 calendar days, then a final payment at 60 days. Using this service is free and doesn’t incur any additional charges.
This service is the same as other lines of credit and just a loan. When you are going to make a purchase through this method you choose the terms of the financing, with a payment term between 6 and 36 months.
When you select the payment term, Klarna will calculate the total interest payable and the monthly repayments, giving you an option of whether to proceed.
As this service is a loan, you will need to complete a full application and Klarna will perform a hard credit check which will affect your credit score.
Does Klarna Affect Your Credit Score?
Depending on which option you select, yes, it will affect your credit score. The ‘Pay in 30 Days’ and ‘Pay in 3’ options only require a soft credit check which is only visible to you on your credit report so they don’t affect your credit score.
However, the financing option that allows you to split your payments over a longer time period is processing a formal loan and they will perform a hard credit check. This hard credit check does affect your credit score and it is recommended that you have no more than two hard credit searches every twelve months.
To understand more about what affects your credit score, and even how to improve it, make sure to read this post that I’ve written on how to get an excellent credit score. This can help you avoid some common pitfalls that can negatively impact your credit score.
Is Klarna Safe?
Without focusing on the issue of taking on unnecessary debt, as a service, Klarna is safe in the way that it allows you to purchase a product now and pay at a later date. This includes collecting payments and storing customer information, such as payment details.
Klarna has built its reputation on no hidden fees which have been a major problem with this type of service in the past with astronomical late fees and painful admin fees. Thankfully this is where Klarna has seen a gap in the market and stepped in.
One problem of using Klarna, and other buy-now-pay-later services is that by purchasing a product or service through a third party customers forgo their consumer rights under Section 75 of the Consumer Credit Act. Klarna does have quite a comprehensive Buyers’ Protection Policy, however, when compared to the benefits of buying directly from the retailer it does fall short.
Section 75 of the Consumer Credit act protect customers by law if a product is faulty, not as described, not delivered or the company goes bust. Using a credit card can also enhance this level of protection, often extending warranties, helping to recover money and possibly even earning rewards at the same time.
What Happens if You Miss a Payment on Klarna?
If you miss a handful of payments, Klarna doesn’t charge any late fees or impose any penalties. Other competitors charge upwards of £10 per late payment, which can drastically increase the price of the product you originally bought. Klarna has also promised that it won’t pass on any of these minor late payment issues to credit agencies so it won’t affect your credit score.
However, if you persistently miss payments with repeated chasing and communication from Klarna, they could pass your debt onto a debt collection agency. At this point, it will feature and negatively affect your credit report.
By not making the necessary repayments, you also risk being banned from using Klarna completely. Your credit limit with Klarna is worked out based on how you use their service, with regular customers that pay on time being able to gradually build up their limit with a good history with the company.
Does Klarna Affect Getting A Mortgage?
Yes, Klarna can affect you getting a mortgage. Mortgage lenders will check your credit score and also your spending spending habits, both of which can be negatively affected by using Klarna.
If you’re concerned about your credit score if you’re wanting to apply for a mortgage, I’ve written a post about whether mortgage lenders look at your spending habits and what to avoid that you may find useful.
Summary – Should You Use Klarna?
In my opinion, no you should not use Klarna, especially the financial option as that charges interest at quite high rates. Know this could be quite controversial so I’ll explain why and also highlight where it could make sense.
Buy now, pay later is a service designed to help people spend more money by deferring payment to a later date, allowing people to quickly spend money on impulse purchases. The 30 day and 3 instalment services are free, and as the old saying goes “if something is free, you’re the product”. You also lose out on potential credit card benefits, such as points, cashback and advanced consumer protection.
Paying for a product through finance, if you select that option, can also considerably increase the price of the product you’re buying, especially if you hold the debt for a long period of time.
For where it could make sense to use Klarna. Sometimes there are offers and discounts on products when you use Klarna, such as an extra 20% off your order. If you use the ‘Pay in 30′ days’ option or the ‘Pay in 3’ option, as these services are free, the cost savings could be worth the reduction in consumer rights and lost credit card benefits. However, remember that this discount is offered to entice people to become regular Klarna users.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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