What is Klarna and how is it different from other Buy Now Pay Later services?

Klarna is a BNPL service for small purchases that lets you spend up to $2,000 at almost any retailer across Australia. You are required to pay off the amount in four equal instalments, spread over six weeks from the date of the purchase. The first instalment is paid when you make the purchase. 

Klarna doesn't charge you any interest or fees for using the service. However, you may be charged a late fee if your fortnightly payment is overdue. For products less than $50, there's no late fee payable. However, if your order value is $50 or more, a late fee of $3 is payable per late instalment, meaning the most you could be charged is $9 across three late payments.

You can visit the Klarna website for a list of stores that offer Klarna as a payment method at checkout. Alternatively, you can issue a one-time ghost card (virtual card) on Klarna to pay for your shopping on non-partner sites or when you are shopping in-store. You are required to enter the amount of money you wish to spend (including any shipping costs) before the card is issued to you. If Klarna approves the amount, you can go ahead and complete the purchase by entering the details of your ghost card at checkout. 

If you are shopping in-store, you'll need to select 'Pay in store' once your card is generated. You can then add your card to your Apple Pay or Google Pay account in order to complete the payment.

Once you purchase an item on Klarna, 25 per cent of the purchase price is held on your linked debit or credit card as the authorisation amount. The remaining 75 per cent is paid in three instalments, due every fortnight. Your ghost card is automatically cancelled if you don't use it within 24 hours, and the authorisation hold is released.

Like most BNPL apps, Klarna also lets you break down your purchases into interest-free instalments, payable over six weeks from the date of purchase. However, unlike other BNPL apps that can only be used for shopping with a set network of retailers, Klarna claims it can be used as a payment method at almost every store that accepts card payments. If you wish to shop with a retailer not listed on Klarna's app, you are only required to type the store's name, and Klarna will connect itself as a payment option for you.

Besides its shop now, pay later service, Klarna's app includes several features to create a seamless and enjoyable shopping experience for users. For instance, you can create wishlists on Klarna and receive price drop notifications on your wishlisted items from your favourite brands. There are also exclusive deals and discounts from local retailers and a rewards club that lets you earn “vibes” on your shopping and exchange them for various gifts.

The maximum amount you may be allowed to spend on Klarna is capped at $2,000. The actual amount depends on various factors. These include your credit history, the number of open payments you have on Klarna, any overdue payments and your overall repayment history on the platform. Those who use Klarna regularly and pay back their purchases on time are typically rewarded with increased spending limits.

One way in which Klarna may affect your credit score is by running a credit check on you when you use it as a payment method for the first time. While a single credit check isn't going to hurt your credit score, it will appear on your credit report as a hard inquiry, which will be visible to any lender that checks your credit report in future. If multiple similar inquiries are listed on your file too close to each other, it could make you appear credit hungry, which may be seen as a red flag by potential lenders. Klarna also performs a credit check on users when they make a new purchase and the last credit check was done over a year ago. 

In general, Klarna can be a helpful tool for budgeting your small purchases and paying for them over a few weeks without any interest charges. However, you need to avoid falling into a debt trap. If you use Klarna (or any other BNPL app) to purchase items you can't afford to repay, you may eventually fall behind on your repayments, leading to late payment fees and the possibility of a default being listed on your credit report. One helpful tip is to calculate your fortnightly repayments before using Klarna to pay for something and run this figure by your budget to ensure you can afford it. 

If you are someone who is given to shopping impulsively, a BNPL service may encourage that habit by allowing you to buy what you need and delay the pain of paying for it by a few weeks. Irresponsible spending, however, could land you in a pile of debt that you want to avoid. So, if you think you cannot use credit responsibly or you have had trouble managing credit in the past, it may be better for you to rely on your savings to purchase what you want rather than use a BNPL service that could make it easier to buy items you can’t afford.