There is a new credit revolution taking over the world. Whilst ‘buy now, pay later’ is not a new concept, Klarna offers something unique by allowing customers to avoid paying for almost anything upfront, from a pair of shoes to groceries.
Want to know more? Jamie Cordingley, Head of Irresponsible Lending here, at Legal UK Services, aims to provide an unbiased opinion on this new phenomenon.
So, what is Klarna?
For those of you who have not yet come across this Scandinavian credit revolution, Klarna is a ‘buy now, pay later’ operator, giving its customers the option to pay the full amount after 30 days or split purchases into three equal payments over three months. There is neither interest payable nor a charge for the service and it is based on your credit rating and affordability. So, even if you don’t have the perfect credit history, you may still be accepted and typically if you have over £250 in your bank account consistently over the previous 30 days.
What’s the catch?
Well, if you keep up with the payments as agreed and don’t overstretch yourself elsewhere, there is no catch. It can be an excellent service that aims to assist buyers in getting their desired purchase quickly and without having to save.
There must be some cons?
Of course. If you do not keep up with the payments, then there are tangible repercussions, such as putting the loan into default and sending it to collections. This will negatively impact your credit rating and impair your future ability to gain cheap credit, or even credit at all.
Will it affect my credit if I make all my payments on time?
No, even though Klarna performs a soft search on your credit rating and offers you a short-term loan, it does not impact your rating, if you fulfil your side of the bargain.
How does Klarna make money?
This is probably the number one question our clients ask us once they understand the process. Like debit cards, Klarna makes money on the transaction as it becomes the merchant. Typically, this is £0.30 per transaction or 3.29% of the transaction — whichever cost is more.
What is the future for Klarna?
Klarna is introducing longer-term credit — between six and thirty six-months — including an interest charge. This charge will be up to 18.99% APR, which positions them a little cheaper than credit cards and on par with the high street banks. There are rumours of a Klarna Credit Card, but we are yet to see anything concrete on this.
Overall, Klarna is a great product — but, for many, it is too good to be true. There is always the risk that your circumstances may change during the term of your finance which could affect your ability to make payments and, subsequently, affect your credit. The only true no-risk way to make large purchases is to save first and pay later!
Want to speak to one of our friendly advisors about issues with Klarna or any other credit company? Then give us a call on 0161 518 0980.