Mortgages.scot

The negative press around Klarna appears to have come from an article by comparethemarket which you can find here. It didn't specifically name Klarna although it appears to have led to a phrased being coined something like "Klarna style products". So it was never about them specifically they just appear to have been used in headlines. Yes, a bit like I am doing but only to help them and you.

What was it really all about?

The article on compare the market focused on Buy Now Pay Later (BNPL). Services that offer your ability to buy something now and spread the payments over however many months you chose. You have seen them right?
Amazon can offer you up to 5 months on some items.PayPal Credit gives you 3 months to pay. Many store accounts offer a period of time to pay before incurring interest. And the list goes on.

The short version of the article is that the use of BNPL services is increasing, people are over-stretching and late or missed payments are resulting in charges which then means a strike on credit scores which makes it difficult to get any other lending that includes a mortgage.

What is Klarna?

Even if you have not heard of them you know what they do. Similar to the examples above Klarna gives time to pay. They have two products which are the most widely used here in the UK.

1. Pay later - Allows you to pay for a purchase up to 30 days after purchase.
2. Pay in 3 - Your purchase is split into 3 equal monthly payments.

When you use Klarna they do carry out a soft credit search. This simply means they are taking a look at your credit report to ensure there is nothing concerning. A soft credit search leaves no footprint, only you can see it, nobody else. It has absolutely no impact on your credit score.

When you use either of the two products above you are not entering into a credit agreement with Klarna. What does that mean?

Simply put it means it is not a regulated product. Why? Klarna never charges you a fee or interest, even if you miss one or all of your payments. This is why the 2 products mentioned are exempt from a regulatory point of view.

Wait, can I just not pay then?

Ah! No. Just because they won't charge you a fee or interest for paying late, you still received something you did not pay for, that is still in the eyes of the law a contract and you have broken it.

Klarna state that they never report information to a Credit Reference Agency. That is true but I suspect they are being a little economical with the full story.

Klarna can still pursue you for payment missed, of course, they will. Here is the missing part of the process they don't mention that freely.

If they ask a 3rd party debt collection agency to recover the amount, that agency can still hit you with fees and other charges related to collecting your missed payments. That debt collection agency can also notify a Credit Reference Agency that you missed a payment and it will affect your credit rating.

How does Klarna make money from these products?

Whenever you buy something using a Debit/Credit Card, PayPal or another service, they all charge the retailer a fee, a percentage of whatever you are buying. Klarna is no different.

They are simply another service retailers add to make you and I buy their products. It may even make us buy more if we are being offered a few months to pay without a fee or any interest.

Other products

Other products may not work the same as Klarna. You may have signed a regulated credit agreement, they may report directly to Credit Reference Agencies or do other things Klarna may not.

Always check your products and understand fully what you are signing up for and avoid those that have harsh or unfavourable terms if you see them.

Is Klarna really bad?

Not at all, they offer a great service it would seem, no fees, no interest. you can use them in a wide variety of retailers and as long as you use them responsibly just as with any provider offering credit then you will benefit the most.

Just remember, if you don't pay the debt will end up with a collection agency and in time they may put the unpaid amount on your credit report. If that happens then yes it will have an impact on a mortgage application, every application regardless of what you're applying for.

Ultimately I believe that Klarna simple got some bad Media by being labelled as the 'market' for convenience.