Klarna’s ‘shop now, pay later’ proposition – is it seducing you into debt?

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iPhone showing Klarna on it's screen. Is Klarna seducing you into debt?

Klarna promises you can “Get what you love today” – but you don’t need to pay for it. At least not straight away anyway.

It’s one of a new-breed of fin-tech companies that let you buy what you want now and pay for it later. But is it seducing you into debt?

Shop now, pay later

The ‘shop now pay later’ concept is not a new one. We’ve been shopping that way via catalogues for decades. And big-ticket household items such as fridge-freezers, TV’s or other tech are almost always offered with interest-free credit, allowing you to spread the cost to make it more affordable.

Klarna is a reincarnation of this concept for the Millennial generation – a shop now pay later scheme much wider than any catalogue inventory and no longer limited to items over a certain price.

It’s combines the switch to shopping online with our ‘I want it now’ culture. And it’s changing our relationship with money.

What is Klarna

Launched in Sweden in 2005, it has grown to become the global leader of the ‘shop now, pay later’ shopping experience.

And boy it’s grown.

It has 80 million customers globally, who make around 1 million purchases a DAY. And over 190,000 merchants on board, partnering with a new one every 8 minutes in 2019.

Klarna allows people who shop online – at stores such as H&M, ASOS, IKEA, Nike and Samsung – to buy now and pay later in one of 3 ways:

  • Pay up to 30 days later

You buy what you want today, and you pay for it in 30 days. This means you can have a lot of clothes delivered, try them all on, send back the ones you don’t like – and only pay for the ones you keep. Pretty much a try before you buy. There are no fees for using Klarna, no interest is charged for the 30 days and you don’t enter into any credit agreement.

  • Pay in 3 instalments

Sometimes only available on baskets over a certain amount, here you split the cost of your purchase into 3 equal payments, due every 30 days. Again, there are no fees and no interest, but you are credit checked at the checkout.

  • Pay on finance

Spread the cost of your purchase over 6-48 months, using a flexible payment plan. You apply for the credit at the checkout and receive an instant decision. There is sometimes an interest-free period on a shorter agreement, with some interest charged on longer term agreements.

How they make money

So, if Klarna isn’t charging you interest or fees (except on those longer credit agrements), how do they make their money? It’s still a business and they need to make a profit.

The answer lies with their merchants – they charge them a transaction fee, a percentage of what you spend, on the promise that you’ll spend more money than you would have without using Klarna.

And you do.

When Gymshark partnered with Klarna, the average order value increased by around 33% without a significant increase in returns.

That’s a strong proposition.

The downside of shop now, pay later

Gymshark is by no means alone. All merchants sign up on the promise of being able to take more of your money, which they do. Klarna and the merchant work together to actively encourage you to spend more, through targeted marketing messages throughout the website you are shopping on.

Dressed up as convenience and giving you what you want, it’s hard to ignore the pull to use Klarna.

This can result in you buying more than you can afford and, eventually, lead you into debt.

It is also incredibly hard to budget if you use Klarna, as payments are not due immediately. People are not very good at forecasting future expenses, which can often result in a surprise bill and you eating into your overdraft or next month’s spending money to pay for last month’s purchases.

Whilst Klarna does have thresholds in place to stop you spending uncontrollably, only you know what you can truly afford to spend.

What If you don’t pay?

If the worst happens and you can’t pay your Klarna bill on time, it does have the potential to affect your credit rating. And any warning letters you receive have a cost attached to them, adding to the debt you owe.

If you are looking to take out a mortgage, the lender will ask for your bank statements to run through your spending patterns – an obvious Klarna habit will likely be seen as a red flag.

Final thoughts

Klarna’s business model is centered around making you spend more than you normally would, and the worry is that this encourages people to buy more than they can afford.

Debt is still debt, and it needs to be repaid.

My advice would be that if you can’t afford to make a purchase out right, you can’t afford it.

And if you do use Klarna, make small orders and set reminders in your calendar to avoid being surprised by a payment.

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