Smart Money

What is Klarna, and How Does it Work?

Klarna offers buy now, pay later financing for shoppers who want an alternative to paying with credit or debit.

Rebecca Lake • November 11, 2021

Want to buy something but don’t have the cash? Buy now, pay later programs like Klarna can help you make purchases without having to turn to a credit card or wait until your paycheck gets deposited.  

Curious about what buy now, pay later means? In a nutshell, it’s a short-term installment loan that you pay off over time. Klarna is one of several programs that offer this financing option for shoppers. 

But what is Klarna exactly? And how does Klarna work? Here’s a closer look at what it means to buy now, pay later. 

In This Article

  1. What Is Klarna?
  2. How Does Klarna Work?
  3. Klarna Pros and Cons
  4. What Stores Use Klarna
  5. Klarna FAQs
  6. Final Thoughts

What Is Klarna?

Klarna is an online platform that offers flexible financing for shoppers. Originally founded in 2005, this Swedish company operates in 17 countries and works with more than 250,000 merchants. In the U.S. Klarna has an estimated 15 million customers. 

The idea behind Klarna is simple: Giving shoppers more time to pay for the things they buy. You can sign up by downloading the Klarna mobile app. Once you’ve created an account, you can shop at partner stores through the app, from Klarna.com or anywhere Visa is accepted. 

Klarna isn’t a credit card, nor is it a traditional layaway plan. Instead, the platform gives you several ways to pay for purchases according to what works best for your budget. 

How Does Klarna Work?

Wondering how to use Klarna and how it works? 

As mentioned, you’ll need to sign up for a free Klarna account to get started. You can do that by downloading the Klarna app. The app is available in the App Store and Google Play. 

Once you’re signed up, you have three ways to pay with Klarna:

  • Pay in 4
  • Pay in 30 days
  • 6 to 36-month financing

Pay in 4 is Klarna’s interest-free payment option. When you choose Pay in 4, your purchase is split into four payments. The first payment is due at checkout. The remaining three are made biweekly over a six-week period. You can log into the app to schedule payments or set them up automatically using a linked debit card.  

Pay in 30 days allows you to complete your purchase and pay off the balance in full within 30 days. There’s no interest and no fees to use Pay in 30. 

You can also take longer to pay off purchases with Klarna. Financing options from six to 36 months are available through Klarna’s partner, WebBank. But if you choose this buy now, pay later option you may pay interest and fees. 

How does Klarna make money?

You might be wondering how does Klarna make money if it doesn’t charge customers interest (unless they’re using the long-term financing option). The simple answer is fees.

Klarna charges fees to the retailers who use the platform to offer financing to shoppers. It’s almost like the card processing fees retailers pay to accept credit card payments. Klarna can also charge customers fees as well. 

Specifically, you might pay a late fee if you don’t pay on time. If you choose Pay in 4, the late fee maxes out at $7. For monthly financing, the late fee can be up to $35. The good news is, Klarna offers the flexibility to change your payment due date if needed. 

How to use Klarna in stores and online

You can use Klarna Pay in 4 when you’re shopping online or in stores. How Klarna works can depend on how you’re shopping. 

To use Klarna online, you can download the Klarna browser extension for Chrome. Once you have the extension installed, you can shop anywhere online. To use the extension when you’re ready to check out, you just click the ‘K’ symbol in the top right-hand corner of your browser window. You’d enter in your debit or credit card information to make the first installment payment and check out. 

Klarna allows you to create a one-time card to use for online purchases. This is a unique card number that’s tied to a single transaction. Each one-time card in your Klarna account represents an individual payment plan. That can make it easier to track your purchases and stay on top of payment dates. 

If you’re shopping in a store, you can use the Klarna app to check out and pay. You’d simply open the app, choose Pay in 4 as your payment option and check out with your linked debit card or credit card. It’s just like using your mobile wallet to pay, only you’re choosing to buy now, pay later for part of the balance instead of paying it all at once. 

Klarna Pros and Cons

Short-term installment loan platforms like Klarna can offer advantages and disadvantages. Understanding some of the main pros and cons can help you decide if using them makes sense. 

Here’s a quick rundown of Klarna’s pros:

  • Convenient and easy to use
  • Works with a wide variety of retailers
  • Flexible payment options, including Pay in 4
  • No upfront fees
  • Earn a $5 reward when you sign up

And here are some of Klarna’s cons:

  • You may pay interest for 6 to 36-month financing
  • Late fees can apply to missed payments
  • Approval for buy now, pay later financing isn’t guaranteed

Does Klarna charge interest?

Klarna does not charge interest for its Pay in 4 and Pay in 30 financing options. So you can buy things now, pay for them later without paying high interest the way you might with a credit card. If you link a credit card to your Klarna account, however, your credit card company could still charge you interest unless you pay your balance in full. Interest may also apply for six to 36-month financing plans. 

Does Klarna affect my credit?

Any time you’re using short-term loans to finance purchases, it’s important to think about what it could mean for your credit scores. And you might have questions like:

  • How does Klarna check credit? 
  • And how does Klarna affect credit? 
  • Does Klarna report to credit bureaus?

First, there’s no credit check involved to download the Klarna app and create an account. So you don’t have to worry about credit score impacts there. 

Klarna does perform a soft credit pull when you apply for Pay in 4 financing. Soft credit pulls don’t help or hurt your credit score and they won’t show up on your credit reports. You may, however, be subject to a hard credit pull if you choose Pay in 30 or monthly financing.

Klarna doesn’t report to credit bureaus if you pay on time. So opening an account to pay over time won’t show up as part of your payment history. 

What types of purchases does this work for?

Klarna works for online shopping and in-store purchases. Generally speaking, you can use Klarna at any of its partner stores or anywhere Visa is accepted. You can even use Klarna to shop online at Amazon. 

So what can you buy with Klarna? 

The answer depends on your spending limit. Klarna offers a minimum $10 spending limit but your maximum limit is set on a per-transaction basis. So the amount you can spend at any given time may depend on:

  • Which store you’re shopping at
  • The amount of the purchase
  • What you’re trying to buy

Klarna can also look at your overall track record as a customer. If you’ve used Klarna for other purchases and always paid them off on time, for example, you might have a higher spending limit than someone who’s repeatedly paid Klarna balances late. 

What Stores Use Klarna

As mentioned, Klarna works with more than 250,000 retail brands. Some of the biggest stores that allow shoppers to use Klarna to pay include:

  • Amazon
  • Macy’s
  • Sephora
  • Wayfair
  • Victoria’s Secret
  • Saks Fifth Avenue
  • Nike
  • GameStop
  • Target
  • Walmart
  • Bloomingdale’s
  • Etsy

You can check the full rundown of where to use Klarna on the platform’s website.

Klarna FAQs

Still wondering how Klarna works or what it’s all about? Here are answers to some of the most commonly asked questions about this point of sale payment app. 

Does Klarna affect credit?

As mentioned, Klarna doesn’t perform any hard credit checks when you create an account or apply for Pay in 4 financing. But Klarna can do a hard credit pull if you apply for Pay in 30 financing or monthly financing plans. 

Klarna won’t report your on-time payments to credit bureaus but they can report late payments or defaulted accounts. So falling behind on your Klarna payments or failing to pay what’s owed could hurt your credit score. You could also be barred from using Klarna for future purchases if your account is in negative standing. 

How does Klarna make money?

Klarna makes money by charging fees to its partner retailers. Klarna can also make fees from customer accounts if you pay late. But again, the late fee you pay is capped at either $7 or $35, depending on the payment plan option you choose.

Is Klarna safe?

In general, Klarna is safe to use in terms of security and account protections. Klarna secures personal and financial information for shoppers who use the mobile app or the Chrome browser extension. Klarna’s protections can help to prevent fraud or misuse of your information through the platform. 

Is Klarna safe in terms of helping you to avoid debt? The answer can depend on your spending habits. If you’re frequently using Klarna to make purchases, that could put a strain on your budget. Making a large purchase could also end up being a budget headache if you’re not able to make the required biweekly payments on time. 

So before using Klarna, consider how likely you are to be able to pay off your balances. Planning your purchases can help avoid putting an unnecessary strain on your bank account

What types of purchases can I use Klarna for?

Based on the list of stores Klarna works at, some of the things you could buy with Klarna include:

  • Clothing
  • Shoes 
  • Accessories
  • Baby items
  • Electronics
  • Home goods
  • Sports and outdoor equipment
  • Health products

So there’s a pretty wide range for what you can use Klarna to buy. The list of things you can’t use Klarna for, the list includes:

  • Bill or rent payments
  • Ridesharing services
  • Government payments (i.e. taxes)
  • Online gaming or gambling
  • Medical care
  • Subscription services
  • Drug or alcohol purchases
  • Gift cards

In terms of what you should use Klarna for, the answer is only those purchases you can afford to pay off according to the terms of your payment plan. 

Final Thoughts

Klarna is one of several options for short-term installment loans. The main appeal of buy now, pay later plans like Klarna is the ability to pay over time without interest charges or steep fees. But point-of-sale apps like Klarna could get you into trouble if purchases put you over budget. Understanding how installment payment plans work can make it easier to decide if using one is right for you.

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