Klarna reviewed: Is it safe to buy now, pay later?

Klarna may seem to make shopping easier. But at what cost? We've discovered something they might not want you to know (but we definitely do).

As a leader in the buy now, pay later (BNPL) movement, Klarna is a popular app.

Its interest-free and fee-free features are particularly appealing to many. They let shoppers buy what they want today and worry about repayments later with (seemingly) little risk to their bank balance.

Think this sounds too good to be true? We thought so too so we decided to look into the real impact of their payment services on how we shop. And we were pretty shocked by what we found.

What is Klarna?

Klarna is one of the largest banks in Europe. They offer online payment services to shoppers around the world. It was co-founded in 2005 by its current CEO, Sebastian Siemiatkowski, along with Victor Jacobsson and Niklas Adalberth.

The company pushes the central message that you can buy what you want today, and deal with payments later.

You'll notice a huge number of online retailers in the UK offering Klara's BNPL services at the checkout.

But as we'll explain in more detail later, there's a reason why so many shops are keen to offer you the option to buy now and pay later. That, it seems, is because they want your money – and more of it.

Of course, Klarna is not the only BNPL service available to shoppers in the UK. You might have come across other ones, like Clearpay, PayPal Credit and Laybuy.

However, Klarna's a particularly big name in the UK. As we're aware that some of our readers use Klarna, we looked into them to find out more.

What we found concerned us – as did their response when we asked for comment.

Disclaimer

Before we explain the potential issues in detail, we want to recognise that there are ways to use BNPL carefully.

In fact, we've heard from some students who give Klarna positive reviews. We're not here to tell you to never use them. But, if you're thinking about using Klarna or a similar BNPL service, it's important to know the risks.

Some of the risks are relatively well-known. You might have heard about the potential impact of BNPL on your credit score, or the risk of slipping into debt by owing more than you can afford.

But, on top of these, there's another risk that not a lot of shoppers seem to realise. That's the way Klarna and other BNPL services can lead you to spend and buy more, possibly without realising it.

When you know where to look, the statistics are there, but they've generally been in content aimed at businesses. In consumer-facing content, we've found them to be distinctly lacking.

Our aim is to help you be as informed as possible. So, if you do decide to use BNPL, you'll do so with an awareness of the risks.

How does Klarna work?

As well as a 'Pay now' option to immediately pay for purchases in full, Klarna offers a few BNPL payment services:

• Pay in 30 days – This gives shoppers up to 30 days to pay for their purchases. This an unregulated credit agreement, and there are late fees (check the T&Cs for more info).
• Pay in 3 instalments – Klarna also gives shoppers the option to pay in three monthly instalments. Again, this is an unregulated credit agreement with late fees (T&Cs).
• Financing – This is usually for higher-priced items. It's a credit product that splits payments across up to 36 months. There is added interest and fees.

They also have the Klarna Card which they describe on their website as "like a credit card, but not". Late fees apply.

Ultimately, these are credit products. What does that mean for you as a customer?

Does Klarna affect your credit score?

When looking at whether it's safe to use Klarna, we'll first look at the potential impact of BNPL on your credit score.

From 1st June 2022, Klarna began telling credit agencies about customers' purchases in the UK using Pay in 30 and Pay in 3.

Your Klarna purchases will be visible on your credit reports held by Experian and TransUnion. The info will include whether you've paid on time, late or if you have any unpaid purchases.

Customers' credit scores won't be impacted by this change for now. However, Experian and TransUnion are reportedly working on it.

Please note that it's already the case that your credit rating could be affected by using Financing or the Klarna Card. These require hard credit checks. This means there will be a record of the check on your credit file with the credit reference agency (CRA). If you miss a payment, the CRA is informed and your credit rating could take a hit. 

What happens if you don't pay Klarna back?

As we mentioned above, if you don't pay Klarna back, this has been visible on your credit reports for Pay in 30 and Pay in 3 since 1st June 2022. In the future, this could start to affect your credit score.

There is already the risk it could negatively impact your credit score if you use Klarna Financing/Klarna Card.

On top of this, if you miss payments, Klarna might use a debt collection agency to recover the outstanding debt.

How does Klarna make money?

The way Klarna makes money varies depending on the type of payment service used by shoppers.

Each time a consumer makes a purchase with either Pay in 30 days or Pay in 3 instalments, the retailer pays Klarna a transaction fee.

However, if somebody is paying for something with Financing, Klarna earns money from a combination of retailer fees and sometimes an interest charge for the consumer.

Are buy now, pay later products regulated?

In February 2021, the government announced plans for the Financial Conduct Authority (FCA) to start regulating interest-free buy now, pay later agreements.

However, the regulation has not yet started. The hope is that, when implemented, it will lead to better consumer protection, more detailed affordability checks and clearer advertising by BNPL providers.

One potential change under the new regulation rules is that BNPL agreements could begin to have Section 75 protection. This means that any purchases that cost over £100 and up to £30,000 would be protected if there was an issue, such as if an item never showed up after being bought.

You can find out more about the BNPL regulation plans on the government's website.

Shoppers spend more with buy now, pay later services

When researching Klarna, we came across an article on the Knowledge section of their website called "How 'Buy Now, Pay Later' is Transforming Online Shopping".

It had a publication date of 30th October 2019 and remained live on the site until October 2020. In the very same week that we asked Klarna about it, the article was taken down.

The article appeared to be aimed at businesses and it included some statistics that were quite... interesting, to say the least.

Included below the heading 'How Klarna installments affect shopping' [sic] were these statistics:

• "68% increase in average order value from shoppers paying with installments."
• "44% of users say they would have abandoned their purchase if installments weren't available."

A Klarna representative told us that these statistics refer to the US market. But that's not the only country where BNPL services have been seen to lead to an increase in spending.

In the same article as the US stats (above), Klarna also referenced a report from the Australian Securities and Investments Commission (ASIC) from 2018 that looked at BNPL services in Australia. Among those stats were:

• "60% of users are young, aged 18–34 years"
• "55% of users reported they are spending more than they did before the BNPL era."

As we'll cover shortly, we've seen a UK-based company say that shoppers' average basket sizes generally increase when there's the option to pay later.

In their article, Klarna had written:

In short: this is THE method preferred by millenials, the hard-to-reach consumer group born roughly between 1980 and 2000.

Is Klarna acting responsibly?

Initially, when we first reached out to Klarna in 2020 while researching for this guide, we referenced the statistics in their article which, at that point, was still live on their site.

In that email, we asked one specific question:

Please could I receive a comment from Klarna on whether the company views it as responsible for their payment services to knowingly lead users, who are often young people with lower incomes, to spend and buy more?

In response, we were sent a two-sentence comment from a Klarna spokesperson:

Our Instalments product helps consumers spread the cost of higher-value purchases over several months, helping them manage their cashflow more effectively, with no interest or fees ever. The average age of a Klarna consumer is 33 years old and the fastest-growing demographic is in fact Generation X (40–54 years old).

It's safe to say, we were pretty disappointed with this response.

Having asked explicitly about whether they viewed it as responsible, we had hoped for an explicit reference to this in return.

In particular, we found it frustrating that their comment included the average age of a Klarna consumer, and which age group is the fastest-growing demographic. This doesn't change the fact that young adults use their services.

After this guide was published in 2020, we heard back from a Klarna representative with updated comments. They said:

We invest significantly in educating our customers on responsible spending. In addition to KlarnaSense, encouraging customers to pause before purchase to ensure they are shopping responsibly. This follows our Mindful Money series launched in 2019 where we work with experts to provide consumers with tips and guides to better money management.

We provide a better, more transparent and more manageable alternative to traditional credit. Our services provide consumers with a clear repayment schedule, no interest charges and no late fees. We believe that by offering a no-cost, transparent and manageable alternative to traditional credit cards, our offer is a positive benefit to UK consumers.

Why was Klarna's article taken down?

As shoppers, we all deserve transparency when it comes to our money. When we noticed that the article, "How 'Buy Now, Pay Later' is Transforming Online Shopping", had been taken down, this worried us.

In response to Klarna's comment, we asked why the article was no longer live.

They told us in 2020:

We regularly review and refresh blog content.

We've since noticed a further change on their site. The 'Knowledge' section that had included that article, among others aimed at businesses, is no longer live.

Looking further into Klarna

As well as the article we mentioned earlier, there are several videos on Klarna's YouTube account that appear to be aimed at businesses. They include stats that emphasise the way in which BNPL services lead shoppers to spend and buy more.

One is a video, posted in April 2019 on Klarna's account, 'Klarna X Gymshark: Case study'. We've previously seen Klarna link to the video from the 'Klarna for business' section of their site.

In the video, Niran Chana, who's named as Trading Director at Gymshark (a UK-based company), discusses the impact Klarna has had on sales:

There's an evident uplift in using Klarna, not just on Black Friday, but just normal trading periods where you do see obvious incremental spend, rises in average basket value.

One of the areas that I was really keen to keep an eye on was actually our returns impact. So, you know, were people just spending for the sake of it and then returning because they knew that they could spend?

And we've not seen any real hit.

Another video on Klarna's YouTube account called 'Klarna – Pay later in 30 days – UK' from 6th May 2020 mentioned these stats:

The video's clearly aimed at retailers, with the voiceover saying:

Add 'Pay later in 30 days' to your checkout today for a better shopping experience.

You'll get an increase in average order value, a higher purchase frequency and very satisfied customers.

From what we can see, Klarna tries to make the shopping experience easy and enjoyable for customers. This seems to come with the understanding that this will lead them to spend more.

But who really benefits from this?

Shoppers may feel satisfied as the experience is intended to be extremely smooth. But, from a financial perspective, Klarna and the retailers seem to be the real winners in the transactions.

Why do you spend more when you shop with Klarna?

There are a few reasons why Klarna's BNPL services could lead people to spend more. For example, it can feel like there's less need to wait until payday/your next Student Loan instalment to buy something.

Plus, when there's the option for payments to be split up into smaller chunks, purchases can seem less daunting.

Is Klarna safe?

Klarna is safe to use as it's a legit payment service, but we're concerned about the potential financial impact of shopping this way every month, or even every other month.

This can add up. By the end of the year, you could have spent a significant amount more than you would have otherwise. This would only make it harder for you to afford the full price of necessary purchases next year.

As a result, you could see an increased chance of falling into debt. If you're using Klarna Financing, your credit score might be affected if you struggle to keep up with repayments.

Remember that Pay in 30 days and Pay in 3 purchases will now be visible on your credit reports. And the risk of your outstanding balance getting passed to a debt collection agency is, in itself, very scary.

In 2021, Citizens Advice found that one in 10 BNPL users had been chased by debt collectors in the year leading up to their survey.

If you do use Klarna, be mindful of the common temptation to spend more with BNPL than you would otherwise. Keep in mind the statistics and info covered in this guide and take your time when making purchases.

Before getting anything, ask yourself whether you're buying it because you need it, or simply because you can. The more you ask this, the less you could end up spending and the safer your financial situation can be.

Save the Student's take

At Save the Student, we're all about helping you save, make and manage your money. It's perhaps no surprise, then, that we're not big fans of shopping with buy now, pay later services.

We're stopping short of telling you never to use these payment services. But it's important to do plenty of research before choosing a buy now, pay later option at the checkout.

Jake Butler, Save the Student's money expert, said:

Don't be fooled into thinking Klarna is there for your benefit. The intention is to make it easier for you to part with your money.

There is an argument that you can use BNPL services responsibly and many would argue that this is a safer way to borrow than the alternatives. This doesn't make it a good thing.

If you normalise paying for things in this way it could encourage poor, and often risky, financial behaviour in the future.

Rather than encourage students not to use the service, I would recommend that more thought goes into whether you would make the purchase if the service didn't exist. If the answer is no, then it's best to abandon your basket.

As well as being good for your bank balance, cutting down on your fashion consumption is a great way to reduce your carbon footprint.