The Buy Now Pay Later sector has grown rapidly in the last year with millions of people across the UK using firms such as Klarna and Clearpay to spread the cost of their online shopping. While they can be a useful tool for those who want to manage payments, they can form a very slippery slope for those who don’t fully understand what they’re getting into.
Although it has been in talks for the last few months, the sector still remains unregulated so consumers have little protection when compared to regulated products such as credit cards and overdrafts.
Holly Andrews, Managing Director at KIS Finance and personal finance expert, outlines five things that shoppers need to know about the UK’s biggest BNPL service, Klarna, while using it for Christmas shopping this year.
You will pay interest with their financing option
There are different payment options when it comes to using Klarna, and it’s very important to fully understand which method you’re using and the implications of doing so.
Klarna will often be advertised as interest-free, which is true if you use their ‘pay in 30 days’ option. This is a form of invoice which gives you 30 days to pay off the full balance, and for this you won’t be charged any interest or fees. This is also true of their ‘instalments’ option which allows you to pay in 3 equal instalments over 60 days.
However, if you use their financing option to pay in monthly instalments, then you will be charged interest on this. If you are eligible for this option, you can pay for your shopping in equal instalments over 6 to 36 months, and you will be charged a maximum APR of 18.9%.
Before you purchase anything using Klarna, you must read the terms and conditions so you know exactly what you’re getting into. Make sure you also take the interest into account when you’re calculating how much you can afford to borrow and pay back.
It can affect your credit score
If you use either Klarna’s ‘pay in 30 days’ or ‘instalments’ option, only a soft credit check will be carried out. This will not affect your credit score and other lenders will not be able to see this on your report. Klarna says that your credit score will not be affected even if you fail to pay within the specified timeframe.
However, using Klarna’s financing option will mean that a full credit check will be undertaken. This can affect your credit score as it will be classed as a ‘hard search’ and other lenders will be able to see this on your report when you make future credit applications. Your credit score may also be negatively affected if you fail to keep up with the monthly payments.
Again, make sure you read the terms and conditions so you know the full implications of which option you’re taking out.
Debt collectors can be called
Whichever payment option you use, debt collectors can be called upon if you repeatedly fail to pay under the specified payment terms.
Klarna says that they will do everything they can to avoid this. They will send you multiple reminders about your payments and they will do what they can to find an alternative payment arrangement. But if you ignore their reminders and the debt remains unpaid after several months then this will be passed to a debt collection agency.
You must remember that when you use a BNPL service, you are entering into a legally binding credit agreement. If you do not take it seriously and continue to let your debt build up then there can be very damaging consequences, including affecting your ability to obtain a mortgage in the future.
You may be charged fees for using a credit card with BNPL
Some users have been charged fees by their bank when using a credit card with Klarna’s ‘instalments’ option. Tesco Bank, Halifax, and Bank of Scotland have been named specifically for doing this.
This is likely because the bank is classing the Klarna transaction as a cash advance, and therefore applying cash advance fees. This is because you’re not paying the retailer directly.
This fee is not charged by Klarna and they are unable to prevent it, so it’s important that you watch out for this and change the card that you’re using if you are charged fees.
What to do if something is wrong with your order
If you receive a product that you didn’t order, or a product that is faulty or broken then you can pause your Klarna instalments. You need to sort the issue with the retailer, but you also need to let Klarna know that there has been a problem. You can do this on the Klarna app.
By doing this, your payment plan will be paused until you resolve the issue with the retailer, and then they will inform Klarna if any refunds need to be made.
If you are unable to resolve the issue with the retailer directly, then you can provide the information to Klarna who will then investigate further. This can take 30 to 50 days before a decision is reached.