buy now pay later app
Klara offers short-term, interest-free loan options without impacting your credit score. Borko Manigoda/Pexels

A Reddit user expressed shock in a post after finding out he could pay for milk and bread in instalments. Financing for milk and bread? Yes, you read that right—Klarna's "Shop Now Pay Later" app allows you to buy groceries and shop for almost anything from top brands across the globe, such as Nike, Instacart, Prada, Temu, Yeti, and Prada.

However, credit for daily essentials could tempt people to get trapped in repayments, interest payments, and penalties, according to the Redditor. The person stressed that the system is being influenced in such a way that we are compelled to get by with credit and then get punished for doing so.

Before taking the financing route on Klarna, it is vital to understand how the app works, what the loan terms are, how it impacts your credit profile, and ways they earn money from you.

The Swedish company has partnered with 500,000 merchants across 45 nations to offer an affordable shopping experience by splitting bills into short-term, interest-free loans. They also have provisions for traditional financing, which isn't interest-free and can impact your credit score. In turn, these brands pay Klarna to facilitate more affordable purchase options for you.

How Does Klarna's Buy Now, Pay Later Option Work?

Like any other debt, Klarna may charge you interest rates or late payment fees, depending on your chosen loan option. When checking out, Klarna may offer up to three options to split your bills across weeks, months, and even years.

The first option, "Pay in 4," splits your purchase amount into four interest-free payments. You pay the first instalment at the time of the purchase and the remaining three over the next six weeks, with each payment two weeks apart. The late fine could be more pleasant, though. You pay $7 or 25% of your purchase amount, whichever is less.

The next is the "Pay in 30" option. It allows you to buy products without making any initial down payment or attracting any interest rates. The catch is that the whole amount becomes due in 30 days.

Lastly, you may have the option for traditional financing for larger purchases for tenures of up to 36 months at interest rates ranging from 0% to 24.99%, depending on your credit score. If you are eligible, you can check the interest rate on the app before accepting the loan terms.

Is There Any Eligibility Criteria?

Klarna mandates that users must be at least 18 years old, and they run stringent eligibility checks on each purchase to ensure they lend only to people who can repay.

Unlike credit card applications, rejections for pay-later options on Klarna don't mean you won't get approved later. The reason is that these decisions are made on a purchase-by-purchase basis. Regularly buying from the Klarna app also improves your odds of securing the best options and rates, if applicable.

Linking your bank account helps Klarna analyze your spending habits and improve your chances of securing more loans. Since Klarna carries out a "soft check" on your credit profile, it doesn't impact your credit score.

Remember, you can take out several loans on different purchases simultaneously, but a higher number of outstanding loans can lower the scope of new loan approvals.

Making timely payments for most loan options on Klarna isn't reported to the credit bureaus and thus won't improve your credit score.

What Else Can You Do With The App?

Klarna offers much more than flexible purchase options. You can compare prices across stores, check price history, and benefit from coupons automatically applied to your purchases on checkout.

Set up alerts for when prices drop, and even enjoy exclusive deals and rebates on your favourite products. You can also store loyalty cards in one place for lightning-fast access anywhere, anytime.

If you buy from Klarna frequently, it can also act like your budgeting app. You can track and manage payments, set spending limits, and categorize purchases to stay within your monthly budget.

Klarna goes further to provide you with live store-to-door package tracking features. Its CO2 tracker also displays an estimate of the carbon footprint of your purchases, which you can offset by donating to climate initiatives directly from the app.

Lastly, returns are hassle-free. When you return a package, Klarna will immediately stop loan repayments for the returned products.

Do You Really Need a Loan for Bread?

Remember, Klarna's revenues and partnerships with merchants depend on you to take out loans from the app. Naturally, Klarna has tried to make the loan process as simple as hitting the accept button.

People with low credit scores who want to avoid interest rates or need something urgently but lack money may feel tempted by Klarna's ease of securing loans.

Surging living costs, high inflation, slow wage growth, job losses, and rising loan defaults can make Klarna so lucrative for many. However, the problems you can face are similar to other loans like credit cards.

You may feel like spending more than you need, racking up multiple loans, hurting your credit score if you miss traditional loan repayments, and even losing all chances of getting further loans from Klarna.

If you need to use the loan options, set a budget limit on the app so that you won't exceed the threshold even if you don't track spending on the app.

Klarna is accredited and rated A+ by the Better Business Bureau and has a 4.1/5 rating on Trustpilot based on over 240,000 reviews.