Buy now, pay later – The New Debt Trap?
Klarna – ‘Free Credit’?
Many of you may or may not be familiar with the new payment method offered during online checkout called ‘Klarna’. It isn’t until recently that I’ve started to hear people mention this and curiosity has taken hold and forced me to do some research. Klarna is a payment solution that allows you to purchase items now and pay for them later, you have 30 days from the day the items were dispatched to make this payment. This payment method is now available on many of online stores such as ASOS, Zara, Gymshark, JD and Schuh to name a few.
This sounds ideal, right? Whether you’re unsure of which size you need or you can’t decide between two different outfits, you now have the option to order them all, try them and compare without seeing a dent in your bank balance. Try before you buy, a dream combination!
The Growth of Klarna
In recent years Klarna has had massive growth as a company and is now available at hundreds of stores and is continuing to sweep across online retailers. It is approximated that Klarna has an average of 25,000 new UK users per week, 25,000!!
This is not just music to the ears for the creator of Klarna but also for those retailers who engage with it as they have found an increase in store orders of 30%, with the average spending amount also increasing by 34%.
The majority of Klarnas users appear to be those who are in their late teens and early twenties. This may be down to the impulsive nature of this age group of people or due to the fact they do not view this type of instant financing as ‘real debt’ which is cause for concern. (This only highlights all the more reason we should be teaching our children about money and debt from a young age!) Debt experts are treating this as any other credit system, however clever marketing has allowed Klarna to get its foot through the door with a susceptible, unsuspecting market.
Online shopping has reached epidemic proportions! A study conducted by Klarna found that 74% of the 2,000 respondents would spend more money online, if offered instant financing, than in a retail store. That is 1,480 people who are willing to spend increased amounts of money, money that they technically don’t have to spend at the time, due to the convenience of instant financing. It is easy to see how this type of credit can quickly become problematic and why more and more people are finding themselves in debt in today’s society.
A Help or a Hinderance?
It is easy to see why Klarna is so appealing. Imagine this, you need a new dress to take the town at the weekend but it’s the weekend before payday and your bank balance says no. Klarna can solve this problem! You can buy the dress regardless and just clear the bill as soon as payday comes around.
Or, you’ve got a wedding coming up and you just can’t decide what to wear. Klarna can solve this problem! You can now order a few different outfits to try on the day and decide which you prefer before sending the rest back. Surely there’s a catch?
Klarna allows you to spend money in anticipation of your next paycheque. It is possible that by the time comes around you realise you can’t afford all of this this month either. Instant finance promotes bad money management and frivolous expenditure. (You can read our blog on the best budgeting apps of 2018, to help you manage your money).
However, the real catch is in the small print.
Klarna’s regulations state that you have between 14 and 30 days to pay for any items you wish to keep and to return any unwanted items, which seems fair. However, we are human and amidst our busy schedules it is possible for things like this to slip our minds. If you fail to return an item, regardless or whether it fits or whether you’ll ever wear it, you are required to pay for it.
If you fail to make your payment date, Klarna will attempt to remove this from your account and if they fail to do so, they will help settle your bill for a total of 120 days but after that your debt is referred to a debt collection agency. The soft credit check that is run to ensure you are eligible to use Klarna at the beginning is now hard and is added to your credit report…yikes.
Klarna has, for sure, upped the checkout game on many online stores and given that it is used correctly by people who are capable of managing their finances and resisting the temptation of a whole new wardrobe, it is no doubt a great tool to have access to with many benefits for the user.
However, if you’re prone to living a champagne lifestyle on a lemonade budget, perhaps a budgeting app such as GoodBudget or Mint would be more beneficial to help you keep things in check.
If you have any concerns in relation to any debt you may have accumulated, you can contact us on 0333 939 7920 and speak to a member of our team who will be more than willing to discuss your options.