Klarna Review: How Does It Work?

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Need to shop but want to spread out your payments? Want to sample a product you find online before deciding to keep it?

Klarna is one of several major “buy now, pay later” companies that are becoming massively popular in the United States.

In this article, I’ll explain the risks associated with Klarna, how it works, the spending limits the company offers and more.


Table of Contents


Klarna: Quick Look

Klarna at a Glance 
Interest Rate0 to 29.99%
Term LengthSix weeks to 36 months
Loan AmountMinimum $10; no defined limit
Late FeesUp to $7 (max 25% of single payment)
Credit Bureau?Can report late payments
Automated Payments?No

What Is Klarna?

Founded in 2005 in Stockholm, Sweden, Klarna offers point-of-sale loans, otherwise known as “buy now, pay later.”

It operates in 17 countries, launching in the United States in September 2015.

Klarna counts Visa, Sequoia and Ant Financial (the parent company of Alibaba) among its investors. Headquartered in Stockholm, Klarna has a U.S. home base in Columbus, Ohio.

Valued at $45.6 billion during a June 2021 fundraising round, Klarna’s website says the company works with 250,000 merchants and claims 90 million active customers (15 million in the U.S.).

You can make purchases online or in person through Klarna’s merchants. Its brand partnerships include:


How Does Klarna Work?

Here are the steps to follow if you want to make a purchase with Klarna:

  1. Download the Klarna app.
  2. Connect the app to a form of payment (debit card, credit card or bank account).
  3. Choose Klarna as the payment method when you’re ready to make a purchase (on the retailer’s checkout page online or in the app if you’re shopping in a store).
  4. Go through the nearly-instant credit approval process.
  5. Make your payments (some Klarna options require a down payment).

Klarna, unique among the “buy now, pay later” (BNPL) companies I’ve reviewed, offers four different payment plans. Each of those plans comes with its own set of nuances.

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1. Pay in 4

This is the industry-standard BNPL payment plan. You’ll make four equal, interest-free payments, one every two weeks (15 days in California).

The only difference between Klarna and other BNPL operators is that, if you buy through Klarna online, your down payment won’t be processed until the merchant “completes” your order. That’s typically on the shipping date rather than at the time of the sale.

If you make all your payments on time — paying for the item in full within six weeks (45 days in California) — you won’t owe a cent in fees. If one of your scheduled payments goes 10 days past due, Klarna will charge you a late fee of up to $7 (never exceeding 25% of your installment payment).

You’ll also be in danger of defaulting on your loan. The potential consequences include ruining your credit, having a debt collection agency come after you and getting banned from Klarna.

Merchants make refund decisions (not Klarna). But if a merchant approves you for a return and you’ve paid Klarna (partially or in full), you can get a refund to your original payment method.

2. Pay in 30 Days

Do you like testing items without committing to purchase them when you shop online?

The old-fashioned method for doing that is keeping your receipt and shipping the item back to the sender. But that can lead to slow returns that hold up your money.

Klarna offers “Pay in 30 Days” as an alternative. Once your item ships, Klarna emails you an invoice that’s due in 30 days. You’ll owe zero interest and won’t be charged any fees.

Just like Klarna’s other financing options, you’ll pay with a bank account, debit card or credit card.

You can return your purchase if you don’t want it. If the merchant approves your return, you won’t owe Klarna anything. In other words, you can test out the item before paying. You get a chance to physically see an item that you buy in person at a store; this gives you an opportunity to do the same when you’re shopping online.

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If the 30-day deadline is approaching and you still haven’t paid your bill, log into your Klarna account, select the purchase you returned and click “report a return.” Klarna says this will pause your payment until the merchant processes your return.

There’s a major risk with this option according to the terms and conditions listed on Klarna’s website: If you fail to make your payment by the due date, you’ll be in default of your loan.

Again, that can mess up your credit, send a debt collection agency after you and get you banned from Klarna.

3. Financing for 6 to 36 Months

Klarna partners with WebBank, which is FDIC-insured, to offer something similar to a personal loan.

Klarna says that it may do a hard pull on your credit when you applying for this longer-term option.

The minimum purchase price for this option is $540. The interest rate will typically be 19.99%. But Klarna and WebBank offer terms between six and 36 months and interest from 0 to 29.99%. (That 0% is usually part of a promotional offer, and the 29.99% likely means your credit isn’t that great.)

If you don’t pay off your balance by the end of each billing cycle, you’ll get charged interest 23 days later. The company charges a minimum of $2 in interest per month.

Klarna markets this option as “flexible spending for larger purchases.”

4. Pay Now

This is virtually no different from paying with a debit card, credit card or through your bank account. If you use “Pay Now,” you’ll pay for your entire purchase upfront. However, you’ll check out via the Klarna app.

Why would anyone take the time to do this? Because Klarna sometimes offers discounts with its partners and sends you price-drop notifications. This is supposed to create a win-win-win for you, Klarna and the merchants.

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My Experience With Klarna

The first item on the Klarna website menu is “Shop.” Click on that, and you’ll get to the partner brands.

Klarna separates them into 17 separate categories. I imagine that most people are shopping at specific stores and don’t notice Klarna (and other BNPL companies) until they get to the checkout page.

Still, it’s nice to be able to sift through all of Klarna’s partner brands in a practical way.

The functionality works just as well on the Klarna app as it does on the Klarna website.

I discovered a boutique salt and sugar company and bought Wild Blueberry Sugar, Black Lava Salt and Black Truffle Salt. I know that because I can still see each individual item and their prices when I’m logged into Klarna.

The BNPL company gave me several intuitive, clear, visual indicators on its app and website about when my payments are due, how much I had already paid and how much I owed.

I also found a way to schedule payments without much digging.


Klarna Review: What Happens if You Miss a Payment?

There may be a grace period in some cases. But if you’re late on a payment, Klarna hits you with the trifecta: late fees, debt collection agencies and credit bureau reports.

For the Pay in 4 option, if any of your scheduled payments go 10 days past due, Klarna will charge you up to $7. Its late fees will never exceed 25% of your installment payment amount.

The Pay in 30 Days option doesn’t charge fees. But the financing option charges late payment fees of up to $35.

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You go into default immediately if you don’t meet the deadline for Pay in 30 Days. With Pay in 4, you get at least 10 days of grace. And for the longer-term financing, you get at least 23 days from the end of your monthly billing cycle to pay.

Depending on how overdue your payment is, Klarna may report you to the credit bureaus, which can mess up your credit score. It may also hand over your debt to a collection agency.

This type of missed payment can linger on your credit for years and lower your credit score.


How Does Klarna Determine Your Spending Limits?

Like many of its competitors, Klarna runs a soft credit check when you apply. This won’t impact your credit score. (The company may run a hard check if you’re applying for longer-term financing.)

Klarna will provide a near-instant decision along with an email explanation if it rejects you.

I filled out some basic information with Klarna and the site pre-approved me for an initial $500 credit line for its Pay in 4 option. I had no previous history of payments through Klarna, but I do have a strong credit score.

The company imposes a $540 minimum purchase for its longer-term financing (six to 36 months) and a $10 minimum for other methods. At least publicly, it doesn’t define its maximum loan amount.

You can increase your limits over time by improving your credit score and by showing a history of on-time payments through Klarna.


Klarna Pros

Here are some of Klarna’s advantages:

  • More options relative to competition. The company offers four different payment options, which is more than I’ve seen from any other “buy now, pay later” company.
  • Zero-interest loans. Klarna’s Pay in 4 (not to be confused with the PayPal program), its most prominent financing option, offers interest-free installment loans.
  • Large number of partner brands. Klarna claims it works with 250,000 merchants in 17 countries. Among the BNPL services I reviewed, only PayPal’s Pay in 4 claims to work with more brands.
  • Rewards program. Called “Vibe,” the Klarna rewards program allows you to rack up one point for every dollar you spend. You can redeem rewards for gift cards from major retailers.
  • Simple interest. Credit cards typically charge compound interest. That costs you more money than the simple interest that Klarna charges.

Klarna Cons

Here are some of Klarna’s disadvantages:

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  • Can threaten your credit if you miss payments. If you miss a payment deadline, the company reserves the right to report that to the credit bureaus. This can impact your credit and stay on your credit report for a long time.
  • Charges late fees. You’ll get slapped with a late fee of up to $7 if you don’t pay on time. That’s easier to do than you may think, as payments aren’t automatic.
  • Doesn’t report on-time payments. If you make on-time payments on a credit card (or to service other debt), it usually gets reported to the credit bureaus. This can help you build a good credit score over time. You won’t get that benefit when you borrow from Klarna.
  • Can encourage excess spending. It’s easier to spend by swiping or tapping a plastic card than by paying with cash, money expert Clark Howard says. It’s even easier to buy when you owe nothing upfront, he says. This can lead you to spend more money than you otherwise would (or should, in some cases).

Alternatives to Klarna

The best alternative to “buy now, pay later” is to avoid debt: Just say “No.”  

Alternatively, you can pay with a credit card. Klarna offers rewards for purchasing through its service, which is rare. But many credit card rewards programs offer more value.

Klarna offers simple interest, which is better than the compound interest that credit card companies typically charge. However, the company’s standard purchases carry 19.99% APR. According to CreditCards.com, the average credit card charged 16.2% interest as of Sept. 23, 2021.

If you’re isolating BNPL options, here are some of the other major choices:


Final Thoughts

Klarna offers four different payment options, including the typical “buy now, pay later” method: splitting your purchase into four equal, interest-free payments.

It also runs a rewards program. That potentially negates one of the advantages of using a credit card. However, Klarna charges late fees and reports missed or late payments to the credit bureaus. That even seems to happen instantaneously if you miss the deadline for the Pay in 30 Days method.

Messing up your credit can be a big deal.

Klarna may make sense for some circumstances and personalities. But be cautious and ask yourself questions before you decide to use the service.


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