Klarna is a popular Buy Now Pay Later service that allows you to pay for purchases in easy installments. If you are wondering if Klarna charges any interest or hidden fees to offer such credit, you are on the right post to get the details.
Klarna is a Swedish-based BNPL service provider that operates in more than 45 countries, with more than 20 million customers in the US alone (more than 147 million customers worldwide). Klarna has partnerships with more than 400,000 retailers across the globe.
Klarna offers various BNPL options with the popular ones being “Pay in 4” installments in intervals of 2 weeks or “Pay in 30 days” in a single go. Klarna does not charge any interest on these options, but there is a late fee of up to $7 if you miss payments (total late fees are capped at 25% of order value).
However, if you are opting for long-term finance options like Klarna Pay in 6 months and more(available up to 36 months), this is subject to an interest rate of up to 24.99%APY. This is a traditional credit offered by Klarna issued by WebBank.
Does Klarna Charge Interest?
Klarna does not charge any interest on “Pay in 4” or “Pay in 30 days” payment options. But you will be charged late fees of up to 7 dollars if you miss paying installments on time (generally levied after 2 unsuccessful attempts)
If you opt for long-term finance options like Klarna pay which comes with a tenure of 6 months and beyond up to 36 months, you get charged an interest rate (0-24.99% APR) which is displayed at the time of application.
So Klarna does have an interest-free model if you opt for standard short-term finance plans like Pay in 4 or Pay in 30 days. While you may find this too good to be true, there is a business model at play here. So let’s answer the next question that may pop up in your mind.
How Does Klarna Make Money?
Klarna makes money by charging transaction fees and commissions to merchants on sales through Klarna, late fees, interest on their long-term financial products, etc.
The bulk of revenue comes from the fees charged to retailers, as the model is to increase affordability for customers, which in turn drives more sales for the retailers.
Many brands especially online brands leverage Klarna to enable customers to experience their product for the first time, without even paying upfront (e.g. using Klarna Pay in 30 days plan)
Merchants pay transaction fees even to banks on credit card transactions. Banks also make a good amount of money from consumers by charging heavy interest on late payments on credit card dues. Klarna offers an alternate payment option that keeps the load light on the consumer’s end while having the same kind of transactions fees.
Klarna and other BNPL services have become more popular and demanded by many consumers, which has, in turn, got more retailers to get on board and offer this payment option. This includes youngsters and other consumers who are either wary of using credit cards or don’t have access to credit. So using Klarna helps merchants get access to another segment of consumers and increase their customer base.
More than 26 percent of millennials and nearly 11 percent of Gen Z consumers had tapped BNPL to finance their most recent online purchases, compared to only 7.5 percent of older generations who had done the same.PYMNTS.com
Does Klarna charge interest for 6 months?
Yes, Klarna charges interest of 19.99% APY for 6 months
You can see the fixed interest rate and fixed monthly rate, at the time of application.
What interest rate does Klarna charge?
Klarna does not charge any interest on “Pay in 4” or “Pay in 30 days” plans. However, if you opt for Klarna’s long-term finance option of 6 months (or longer tenure of up to 36 months) you get charged with an interest rate of up to 24.99% APR and late fees of up to $ 35.
Does Klarna charge a fee?
Klarna charges a transaction processing fee only to retailers. As a customer, you can be charged late fees of up to 7 dollars, if you make late payments.
Does Klarna Affect Credit?
Klarna can affect credit if you default on paying installments on time. As per Klarna’s terms, in case of defaults, they can employ a debt collection agency and report to credit bureaus.
To quote Klarna terms, as per their website:
We may report information about your account to credit bureaus. Late payments, missed payments, or other defaults on your account may be reflected in your credit bureau report.Klarna terms
As BNPL becomes a mainstream payment option, there is an increasing voice from regulators to include all such transactions in the credit report and Klarna may have to report BNPL transactions to credit bureaus as a normal process.
So it is reasonable to assume this will impact your credit score in the long run. Make sure you use Klarna credit responsibly and take extra care to pay all installments on time.
Is BNPL worth it?
Every coin has two sides. Though Klarna and other BNPLs claim to be on side of consumers by being interest-free and reasonable with late fees, it is not all good. Ultimately, with all such products, it depends on how you use and an important point to understand is that BNPL is very much a form of credit like any loan or credit card debt.
Klarna and other BNPL options can trigger impulsive purchases and overspending. So if you know what you are getting into and buy only things which you can afford (looking at the total price, not the installment amount). Especially for young users who are getting into credit for the first time, it is important to understand the product and your own behavior patterns. If you have a tendency to overspend and buy into things that you may struggle to afford or regret later, it’s better to avoid BNPL as a whole.
Here are some interesting statistics from a survey by Credit Karma on BNPL:
- 34% of those who have used BNPL services have fallen behind on one or more payments
- 72% of those who missed payments said they believe their credit score declined as a result, with 31% of those saying their credit score declined significantly.
Further, a research by a market research company C+R research on consumer habits, shows that more than half of customers regret buying something on buy now pay later,
While BNPL is definitely a better option than credit cards, it should be used responsibly. Try to avoid using BNPL in a planned manner, only when you absolutely need to and can afford the purchase price and not just because it’s available there as a convenient zero-interest option.