What Is Klarna and How Does It Work? - Pay Later Guide (2024)

Klarna is a BNPL (Buy Now, Pay Later) financing service. Through a mobile app, Klarna allows its users to purchase from retailers without paying upfront. Customers can purchase from retailers like Apple, Sephora, and Macy’s with little to no interest, making it easier to pay for big-ticket items.

The main selling point of Klarna is that it offers great user flexibility when it comes to online shopping. It also empowers users to purchase larger items without having to worry much about paying huge amounts immediately.

How Does Klarna Work?

Online shopping has made the BNPL model more popular because of the ease it offers users in their shopping experience. It’s also easy to get started with Klarna as there is no account sign-up required, just a credit or debit card and information so that Klarna can perform a credit check.

Various studies show that 70% of online shoppers abandon their carts and do not proceed to check out. Options like Klarna make it easier for shoppers to push through with their purchases with flexible payment plans.

Klarna financing is provided in concurrence with WebBank. Fees and charges are:

• APR (Annual Percentage Rate) is 19.99%
• Minimum interest charge is $2
• The charge for late payments is $35
• Late fee is up to $7 for installment purchases

How Is Klarna Different From Traditional Financing Options?

Klarna’s BNPL model claims to be a better option for consumers than credit cards because it prevents people from getting into deep debt. Sebastian Siemiątkowski, CEO of Klarna says that Klarna offers an alternative to credit cards with fees and high interest rates through their in-shopping feature.

Another key differentiator is the way Klarna gives credit on a per-purchase basis, as opposed to credit card companies that offer big borrowing limits. Companies like Klarna also perform ‘soft’ affordability checks, which means that these checks do not affect a person’s credit score.

This is also not visible to other lenders. The consequence for failing to pay in BNPL models is that companies like Klarna can reject a delinquent payer in future transactions.

However, there are rising concerns over the lack of regulation of BNPL models. Some are also concerned that the ‘ease of payment’ selling point may eventually cause shoppers to unwittingly fall into debt.

Benefits of Klarna

Overall, Klarna is a legit and safe option for the following scenarios:

If You Don’t Have a High Credit Limit

If you have a credit card but would want a higher credit limit, a Klarna loan may be a good alternative to maxing out your card, which can lower your credit score.

If You Do Not Qualify for a Credit Card

If you do not qualify for a credit card or are still new to credit, Klarna may be easier to qualify for. Although Klarna considers your credit score, they only perform a ‘soft’ affordability check and there is no minimum credit score required.

Buying Big-Ticket Items

Klarna is a great option for larger purchases that you would rather not pay the full price upon checkout. You can benefit from it if you can save enough to pay on time.

Drawbacks of Klarna

On the other hand, Klarna may not be the best option for you if:

You Want to Build Credit

Klarna does not report to credit bureaus when payments are made on time. The only thing it reports is if you miss payments altogether. As such, you cannot use your track record to build your credit score.

You Struggle With Credit Card Bills

If you currently do not have the budget to pay your credit card bills, then it is not a good option to take out another loan even if it is BNPL, especially for impulse buys or nonessentials.

You’re Bad at Tracking Your Balance

Klarna automatically bills your debit or credit card the moment you choose your payment plan. If you have a hard time monitoring your balance, then overdrawing is a risk. If their charge to your account is unsuccessful, you could either be charged a fee or your loan could be automatically in default.

Tips for Getting the Most Out of Klarna

To maximize your Klarna usage, here are some things to keep in mind:

• Shop Through the App: Use it to split large purchases so you can pay via an installment plan.
• Use a Rewards Card: Klarna accepts all major credit cards, so use a rewards card with cashback or miles so you can maximize each purchase.
• Join Vibe: Join Klarna’s loyalty program, Vibe, which will allow you to earn rewards when using Klarna. It’s free, too.
• Pay on Time: As much as possible, keep track of payment schedules to avoid fees and penalties.
• Track Your Spending: Keep track of your installments, especially if you plan to take on several plans at once.
• Refer and Earn: You can earn $30 for every friend you invite using a Klarna referral code.

Frequently Asked Questions

Is There a Credit Limit on Klarna?

No, there is no credit limit on Klarna. Decisions are made on a purchase-by-purchase basis and are usually based on the following factors:

• Number of Klarna purchases a customer has paid back
• How long a customer has been with Klarna
• Time of day
• Size of purchase

You may find that your Klarna purchase is declined for one of these reasons, for more information read our guide on how to avoid getting declined on Klarna.

Does Klarna Affect Your Credit Score?

Klarna does not report payments made on time, so it cannot be used to build up your credit score. However, if you miss payments or default on an agreement, it will be reported. Your account may also be assigned to a debt collection agency. So in these scenarios, your credit score will be negatively affected.

Does Klarna Affect Your Ability to Get a Mortgage?

There have been reports of people being declined when applying for mortgages because of their history of using BNPL services. Even if a customer has not missed any repayments, they can still be declined when applying for mortgages because lenders look at these things when assessing affordability.

Can You Pay Bills With Klarna?

No, you cannot pay bills with Klarna as it is currently designed only for shopping.

Does Klarna Charge Interest?

Klarna does not charge interest under the ‘Pay in 3’ and ‘Pay in 30 Days’ options.

However, other financing options like month-to-month financing will incur interest.

What Payment Plans Can I Choose From?

Here are Klarna’s Payment Plans according to their website:

• Pay in 3: Splits payments into three equal parts; First payment is made upon checkout and the two other payments will be deducted after 30 and 60 days
• Pay in 30 days: Allows you a 30-day grace period upon purchase without interest charges or admin fees.
• Financing: Allows you to spread the cost over 6 to 36 months. You’ll need to make monthly payments and there will be an interest rate as well.

Is There a Disadvantage to Paying Later?

Statistics from Klarna show that consumers tend to spend relatively more when they have the option to pay on installments or via financing. As such, there is a concern that shoppers may take on a higher debt than they can afford to pay off.

Final Thoughts

BNPL services like Klarna have become increasingly popular in recent years. Because of their flexible payment options, these services are more appealing to younger shoppers who are willing to shop on credit in exchange for smoother shopping experiences.

Like most financing options, consumers must carefully weigh the pros and cons of using Klarna to determine if it is the right option for them at the moment.

More Klarna Guides