Klarna debt - the illusion of being able to afford more
Interest free buy-now-pay-later options have started appearing on a huge number of online retailers’ checkout pages.
One of the most common is Klarna which allows shoppers to pay in either 30 days’ time, with their bank or credit card, or to pay for their shopping in three equal payments, the first taken immediately and the next two 30 and 60 days later.
With 8.6 million Klarna customers in the UK, buy-now-pay-later is widespread and one of the fastest growing methods of payment. When using Klarna, the consumer pays no interest and the retailer foots the bill. They also pay Klarna up to 5% of each sale plus a fee.
It sounds simple enough - but are people being tempted into buying more things than they can actually afford?
Well, yes. Standard economics has proven that costs that happen later just don’t seem as bad to most people. That’s because we all discount the future — and see anything we have to pay in a month’s time as less valuable (or less burdensome) as something we have to pay today. Because of this, some experts say that buy-now-pay-later schemes are very likely to encourage people to overspend.
Top 10 Klarna shops
You don’t have to go far online before you’re offered interest free payments by Klarna or one of their rivals. Some of the most popular Klarna shops include top names like Top Shop, JD Sports, Burton, Misspap, Prettylittlething, Miss Selfridge, allbeauty, Missguided, ASOS and Superdry. If you want a full list of Klarna shops, check out Finder.com
Is Klarna debt real debt?
Purchases that involve no interest, no fees and no late payment charges can look like an easy solution when money is tight. Some consumers literally don’t understand that while buy-now-pay-later may feel like deferred payment, rather than debt, there is little difference. Like any debt, if it is not paid back, purchasers may hear from debt collectors.
The problem is it doesn’t feel like real debt. It is so much quicker and easier to get than traditional debt – signing up takes minutes and the soft credit check takes a few seconds.
That’s a lot easier than applying for a credit card and this speed and convenience is at the heart of concerns that buy-now-pay-later debt could easily mount up and get people into trouble.
The Financial Conduct Authority have recently launched a review of buy-now-pay-later services to examine concerns like this and to examine whether they make affordability assessments harder for other types of lenders with more rigorous processes.
Are there any signs of a ‘ticking Klarna debt time bomb’?
Up until recently, Klarna has actually had a very low level of default – around 1%. That clearly suggests that the vast majority of people who use Klarna do eventually pay it back. But as the economy tanked, Klarna’s credit losses increased – almost doubling in the first half of 2020 compared with a year earlier.
Burgeoning demand for buy-now-pay-later services means that some people are going towards a ‘ticking debt timebomb’.
But retailers are unlikely to want to wind back on them, for the simple reason that they boost sales. Many retailers will be feeling the pinch right now and want to hold on to every sale they can get.
But if debt starts to mount up, regulators may start to look closer at how retailers are using buy-now-pay-later schemes.
As with any debt, it always makes sense to make sure you fully understand your budget and financial situation before you commit to future payments that you could not afford right now. Apps like Money Dashboard can help you work out your budget and see opportunities to trim your spending where you feel you are paying more that you’d like.