Is Klarna’s buy-now-pay-later service encouraging young people to get into debt?

It sounds great in theory, but will you actually send stuff back and pay it off?

klarna buy now pay later

There are two types of people in this world. Those who can grab a particular size from the H&M railing with confidence that it’ll fit, and those who need to hobble into the changing rooms with dozens of items in various sizes draped over each arm. Unfortunately, I fall into the second category.

So when I heard about Klarna and its buy-now-pay-later offering, I thought I’d found a solution to my woes.

What I’ll do, I told myself, is I’ll buy an item of clothing in various sizes (paying no attention to the total cost) before returning those that don’t fit. That way, I’ll be able to have a mammoth trying-on session at home without the harsh and unflattering changing room lights shining down on me. I also won’t see a huge chunk of cash disappear from my Monzo account in one go.

Since its launch in 2015, 60 million shoppers have used the service in Europe and North America. Here in the UK, the number of new users grows by 25,000 a week.

Heralded as an inexpensive way of borrowing money over short periods, it’s ideal for those who don’t want to wait until payday before getting their hands on the latest trend. But although millions of shoppers have embraced the tool with open arms, many finance experts have criticised it for making debt more accessible to young people.

How does Klarna work?

Basically, Klarna lets you snap up the items you want to buy without taking a single penny from your account. On ASOS, for example, you can fill your basket with multiple items of clothing, select the Klarna payment option at the checkout, and relax in the knowledge that your purchases will arrive long before the money is deducted from your account.

If your order arrives and you’re unhappy with your purchase, you can return the items you don’t want and only pay for what you keep.

It offers a 14- to 30-day interest-free period to give you time to pay off your shopping, but the exact amount of time depends on the retailer.

Klarna will send you an invoice requesting payment for the purchases you don’t send back, along with the occasional reminder that your payment is due.

What happens if you don’t pay?

Klarna has been open about the fact that non-payment will affect the customer’s credit score and if a customer is unable to pay for a certain period of time, their account is passed over to a debt collection agency.

Some retailers offer a Klarna product called ‘Slice It’. This lets customers pay in instalments over three to 36 months. Failure to pay results in three warning letters costing £12 each (!!!) and if non-payment continues, a debt collection agency will intervene.

While Klarna’s standard pay-later option only conducts a soft credit check, Slice It conducts a ‘hard’ credit check which will leave an imprint on your record. This can impact your ability to access everything from credit cards to mortgages. Slice It also opens shoppers up to late payment fees. Failure to keep up with instalments could see a customer having to pay interest of 18.9%.

Is Klarna having a negative impact on shoppers’ finances?

As I delved a little deeper into the terms of this new payment service, I started to wonder whether I can really be trusted to use it without winding up in financial trouble. As a personal finance blogger, I consider myself pretty good with money, but even I make careless mistakes from time to time. I forget to cancel free trials, I let gym memberships continue a month or two after I stop working out, and I’m fairly sure there’s a box of mushrooms at the back of the fridge that I’ve been meaning to cook for a fortnight.

Ben Gaunt, 33, is just one shopper who has had a negative experience. He says:

“I used it for one product, forgot to meet the minimum payment once, and the extra fees I incurred were enough to put me off using them in the future. All contact was by email.

To be honest, I wasn’t aware what Klarna was when I agreed – I thought I was setting up a direct debit finance agreement to pay for some music equipment. I didn’t realise the protocol was you pay as much as you want each month (equal to or above the minimum payment).

It was done pretty stealthily. I receive so many emails, it’s easy to miss one – which is what happened.”

Had Klarna been around when I was at university, it would have caused utter mayhem for my finances. Credit cards always seemed like something for grown ups with full time jobs, mortgages and mouths to feed, so I avoided those like the plague, but Klarna seems different. The process is effortless, its branding is modern, and it has strong connections to popular and trusted online retailers like ASOS. The website doesn’t scream debt, financial uncertainty or bankruptcy in your face and it doesn’t seem as sinister or exploitative as other types of easy-access credit such as pay day loans. Looking at Klarna’s customer service section, it’s also incredibly difficult to find details regarding fees and the impact Slice It can have on your credit score.

I can see how young people could easily get sucked into a cycle of buying things they can’t necessarily afford while worrying about the consequences later.

Jane Clack, money adviser at debt advice firm PayPlan says: “This form of introduction to credit does not encourage budgeting and supports the ‘I want it now’ purchases of items people may not be able to afford.”

Peter Tutton, head of policy at the Stepchange debt charity says: “Selling credit is quicker and easier than it’s ever been, but quick decision-making when it comes to credit is not necessarily a good thing. Credit should never be marketed as a flippant thing or something easy and convenient”

On the face of it, the service appears to be ‘free’, but with Klarna stating that it increases the average online store’s orders by 30% and the average spend by 34%, it’s costing customers more than they might think. Although shoppers may praise it for making the process smoother, they’re actually spending more money. Of course, many shoppers will be buying the same item in multiple sizes and returning those that don’t fit, but others will undoubtedly be buying items that they never would have purchased had they stuck within their budget and waited until payday.

Faith Archer is one shopper reluctant to use the payment tool due to concerns over the financial implications. She said: “I worry that Klarna would encourage me to order loads more online, to try different styles and sizes, and I’d be stuck with a bigger bill if I didn’t get round to returning the unwanted clothes. Also, I’m afraid I’d end up forking out extra fees if I forgot to pay on time.”

Surely it’s just a matter of using it responsibly?

Despite its popularity with online shoppers, Klarna is still very much in its infancy and so far there’s little in the way of data to support critics’ claims that it’s having a negative impact on consumers.

As with many other types of credit, I do think that if used responsibly, Klarna has its perks. For example, I can completely see the benefit of using it as a sizing aid. I also think it can be an effective way of buying the items you need without immediately tying your money up or having to wait several days for a refund.

Beth Cunniffe, 28, says: “I’ve never used Klarna but I think it’s something I might try in the future. It would be a really helpful way of paying if I needed something last minute and it was a few days until payday. I understand why some people are concerned about the debt side of things, but I also think it’s just a matter of personal responsibility. If you forget to make a payment, of course you’re going to face financial consequences. If you stop making mortgage payments, you’ll lose your house. It’s just something you need to keep on top of.”

Sarah Whyte said: “I use it with ASOS a lot. I recently went to a destination wedding and bought a lot more clothes than I usually would. Sometimes I’d buy the same outfit in different sizes or colours. Klarna was really good for this as it meant I didn’t have money tied up when I knew half of the items would go back anyway. I’m pretty good with money though so I can imagine for people who aren’t, it’s just another form of credit and that could get people into trouble.”

Holly Rourke, 28, has used Klarna a few times. She says: “I use it more as if I was walking into a shop and wanted to try things on. I definitely don’t keep everything I order and with companies like ASOS who offer smooth and easy returns it’s a win-win. If I was ordering from a company I’ve not had a good customer service experience with I probably wouldn’t order from Klarna.”

When asked if she’d had a good experience with Klarna’s invoice system, Holly added: “It was so easy. When you pay using Klarna on your phone, they link it to your calendar so you know what date you need to pay by. If I’ve ordered anything off there I tend to go on when I get paid. If there’s two transactions it’s simple to pay and once you’ve put your payment details in it’s literally one click on the app to pay.”

Rebecca Smith, 24, said: “I’ve used it once. It made the checking out process a lot simpler, but ultimately, you still have to pay the money in the end and so it doesn’t really save you any time or effort. I forgot to pay the invoice when I first received it and I kept remembering at really inappropriate times like when I was at work. Every time I remembered I’d get stressed out and worked up. In the end, it wasn’t worth the mither.”

A Klarna spokesperson said: “We have safeguards in place to ensure that our products are only offered to those who are able to afford it and who will be able to make repayments in a sustainable way, without impacting their financial well-being. None of our customers can make unlimited transactions. We have thresholds in place to ensure that a customer makes a payment on their current purchases before they are able to make any further purchases, to prevent overspending and encourage responsible purchasing.”

Jenni Hill
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Jenni Hill is a personal finance blogger at Can't Swing a Cat. You can find her on Twitter and Instagram