Before You Click the Buy Now, Pay Later Option: Here’s What Financial Advisors Want You to Know

People who have bought something online lately may have noticed a new payment option floating around: Klarna. 

So what is it? 

According to the company, Klarna offers a number of payment options, including direct payments, pay after delivery, and installment plans – including their flagship Pay-in-4 program.

The appeal of this type of payment option is fairly straightforward: do the shopping that you want now, and don’t pay anything until you have the money. Simply fill out some of your details online to instantly set up your account and checkout without paying a penny. 

Lots of high street chains – particularly fast-fashion brands like ASOS, Very, and JD Sports offer this option – but how does it all work, and is it too good to be true?

How do you use it?

Applying to use one of these services is really simple. Typically, you’ll be given the option when you reach the checkout, and if you select it then it will ask you for a few personal details. At this point they’ll run a soft credit check. There are two kinds of credit checks – hard and soft. The soft kind doesn’t show up on your credit report. You’ll receive an instant decision on if you’re eligible to proceed or not. Soft credit checks, which are run for the Pay-in-4 option, have no impact on your score because they are not reported to the credit bureaus.

If you’re interested in one of their financing options, however, a hard credit check might be required. This will be reported to the credit bureaus and will show up as an inquiry on your credit report. Monthly financing through a Klarna credit account is issued by WebBank, member FDIC. Basically, they’re looking to make sure you pay your bills.

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At this point you’ll also be given the option of creating an account. This will give you access to the app so that you can track your payment and even manage some aspects of your order.

Some people use pay-later schemes to shift the cost of something to after payday, or to spread into easier-to-digest, bite-sized payments over a span of several months. Simply click the option at pay out, fill out your details and enjoy payment flexibility. 

What are the risks?

This type of buy now, pay later arrangement can be a responsible way to manage your money, but only if you understand what you’re signing up for. 

Although signing up for these services won’t hit your credit score, missing a payment would. So, it’s very important to only sign up if you know that you can afford to make the repayments. 

Signing up for a service like this may enable “shiny object syndrome,” where the next latest-and greatest-thing appears to be reach – as opposed to if you had to pay the full price tag up front.

With most credit, a good rule of thumb is to only use it if you know exactly where the money will come from. You also have to manage it closely to ensure you are making your payments, and don’t forget about it and spend your money on something else leaving you unable to pay. 

Some have raised concerns that the ease of these services make them a gateway to other, more dangerous forms of debt. A common rule of thumb to avoid debt is to not spend money if you don’t have it – but if you use credit cards and pay-later options, it’s all too easy to forget you don’t have the funds. That doesn’t have to be the case if you make sure you’re checking in with yourself regularly to be sure that your spending is under control.

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In conclusion, if you use Klarna or similar options like Afterpay, make sure you have a backup scheme in case your payment plan falls through. An example of this might be planning to pay the balance on payday, but knowing that you can cover the expense with your savings if you have to.

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