With retail sales data coming in far stronger than expected in January, Newspage asked brokers if they saw greater evidence of the ‘Klarna-fication’ of spending.
This shift includes people purchasing even low cost items in installments via, say, PayPal — or even deferring payment for six to 12 months, as per Currys and Argos.
Newspage also asked how lenders look at ‘Buy Now, Pay Later’ schemes and whether they can impact a person’s ability to get a mortgage.
One broker, Denni Tyson, said: “I have seen a huge increase in Klarna and PayPal deferred payment schemes on credit reports within the last 12 months.
“I have also seen it massively backfire with a client who missed a £20 payment, which led to them not being able to use a high street lender for their new mortgage.”
Another broker, Laura Bairstow, added: “We have definitely noticed an increase in Klarna usage and, unfortunately, borrowers don’t often realise the impact this can have on their mortgage application.”
Meanwhile, Karen Appleton, head of lending at Gen H, said: “Everyone should be thoughtful about how they use credit, whether it’s a credit card or Klarna.
“Lenders will weigh ‘Buy Now, Pay Later’ data differently in their decisioning, so there’s no blanket rule in this case.
“It’s just about using and building credit wisely. But if you are using ‘Buy Now, Pay Later’ because you’re living outside your means, a lender’s affordability checks would evidence this.”
Further reaction:
Ranald Mitchell, director at Charwin Private Clients:
“Regular use of short-term credit can have a serious impact on your credit score, whether you pay it on time or not.
“Mortgage lenders don’t like these, as it often indicates financial stress or a lack of financial control, namely I can’t afford it but I will buy it anyway.
“Multiples of these short-term buy now pay later arrangements can also increase the chance of a missed or bounced direct debit payment.
“If short term credit carried a warning like, ‘Regular use of short term credit can be detrimental to your credit score and seriously impact your ability to get a mortgage’, many consumers may think twice before taking on such credit.”
Denni Tyson, mortgage broker at Henchurch Lane Financial Services:
“I have seen a huge increase in Klarna and Paypal deferred payment schemes on credit reports within the past 12 months.
“I have also seen it massively backfire with a client who missed a £20 payment, which led to them not being able to use a high street lender for their new mortgage.
“Whilst I think these styles of payment are common, I always advise my clients to proceed with caution and ensure that they don’t have too many on the go.
“It is merely a form of payment that is as common as credit card was many years ago.
“The only difference being is that structured payments are already arranged.
“For this reason, I don’t think lenders necessarily see this as a negative for borrowers and their ability to afford mortgages.
“But I do think people should be careful about how many they have on the go at any one time.”
Karen Appleton, head of lending at Gen H:
“Everyone should be thoughtful about how they use credit, whether it’s a credit card or Klarna.
“Lenders will weigh Buy Now, Pay Later data differently in their decisioning, so there’s no blanket rule in this case. It’s just about using and building credit wisely.
“But if you are using Buy Now, Pay Later because you’re living outside your means, a lender’s affordability checks would evidence this.
“In any case, traditional credit scores only evidence so much about a customer.
“This is why Gen H uses Experian Boost data in our credit decisioning, which takes into account things like Netflix subscriptions or council tax payments to boost users’ credit scores via open banking.
“All told, while having a strong credit history is important to getting a mortgage, it’s more important to be sure you’re living within your means.”
Austyn Johnson, founder at Mortgages For Actors:
“Since Klarna was first advertised, people have been using it as it’s simple and easy for them to spread the cost of a purchase over a short term.
“Even Domino’s accepts it. This says more about the cost-of-living crisis than anything.
“It helps people who are unable to spend lump sums keep their current level of living. They should really make sure that people can afford it, though, as it’s still a type of credit.
“Lenders usually ignore credit that ends within 3 months, but some are starting to look at the history of it. If it’s regular and they always have something on Klarna, it’s right to see it as a commitment.
“If not, then they run the risk of putting the client outside of real world affordability.
“Bespoke manual underwriting is one of the best things around as they can accept you have spoken to your client about it.
“If this is flagged up at the fact find stage, then it should be something you talk to your client about.”
Laura Bairstow, founder at The Mortgage Masters:
“We have definitely noticed an increase in Klarna usage and, unfortunately, borrowers don’t often realise the impact this can have on their mortgage application.
“I have come across borrowers who have purposefully used Klarna as they have been wrongfully advised that it can actually boost their credit ratings.
“Many lenders see Klarna usage as evidence of people living beyond their means and, in some cases if excessive, Klarna usage could actually lead to your mortgage application being declined.”
Mark Robinson, managing director at Albion Forest Mortgages:
“I am always amazed at the ease at which you can spread something over three payments.
“I was buying something for a hobby for £5 recently and it offered me 3 easy payments of £1.67.
“Dependency on spreading the cost of things is obviously going to impact an underwriter’s opinion of someone’s suitability for a mortgage.
“As it often doesn’t show on credit files, once it has been paid off and isn’t on the most recent bank statements a mortgage broker or bank won’t see it.
“However, like any credit facility, there is an immediate danger of people overspending.”
Gary Bush, financial adviser at MortgageShop.com:
“The rise of Klarnafication, Paypal Pay in three and other such schemes across mortgage applicants’ credit reports does lead to mortgage lenders querying spending patterns and worrying, especially when they see requests for income stretches to achieve the loan amount required.
“Consumers need to think before taking on numerous financial transactions of this kind if they know that they will be making a mortgage application in the coming months.
“We financial advisers are good at getting the best results from lenders but we don’t have a magic wand.”
Stephen Perkins, managing director at Yellow Brick Mortgages:
“It’s never been easier to buy now and worry about paying later.
“With budgeting, how to handle money, save and how credit works not taught in schools, many young adults are just lemmings being led off a cliff, signposted by shiny advertising.
“The amount of credit usage is increasing alongside direct debit failure rates, showing that for many all this credit spending is catching up with them.”
Akhil Mair, director at Our Mortgage Broker:
“The normalisation of spreading costs for low-cost items is alarming and raises concerns about financial responsibility.
“Lenders closely scrutinise these trends, which can impact mortgage applications and indicate risky financial behaviour.
“Deferred payment offers may seem tempting, but they mask the reality of accumulating debt and can signal living beyond your means to mortgage lenders.
“It’s crucial for people to prioritise financial stability over short-term convenience and consider the long-term consequences of their spending habits.”
Amit Patel, adviser at Trinity Finance:
“Buy Now, Pay Later has seen a huge surge in demand in recent years but what on paper appears to be a win-win solution for consumers who can purchase items and defer payments until a later date can have huge implications when applying for a mortgage.
“Lenders simply do not like these sorts of schemes. Some lender’s view buy-now-pay-later instalment plans as a ‘red flag’ when it comes to how a prospective borrower manages their money, similar to payday loans.
“General perception of these types of loans and instalment plans potentially indicate financial difficulties, or perhaps a lack of money-management skills.
“It will also impact your credit score: my advice would be to steer clear of all buy-now-pay-later schemes.”
Richard Jennings CeMAP, founder & managing director at Richard Jennings Mortgage Services:
“In regard to Klarna and Clearpay. this is definitely something I am seeing a significant rise in usage.
“Klarna payments are just now starting to appear on credit files via Transunion but as yet are not regular on the main credit filing companies.
“So far from lenders I have yet to see too much pushback though there have been some concerns around usage by some borrowers.
“I am sure regular and consistent usage of these schemes this could be deemed and viewed much along the same lines of payday loans.
“The real issue here is that it’s another finance agreement that sails under the regulator’s radar but has the chance and opportunity to cause people real financial hardship.
“Longer term this could end up the next payday loan crisis with people mounting purchase after purchase then unable to meet the accumulative payments.”
Michelle Lawson, director at Lawson Financial:
“Klarna usage is definitely something I am seeing more of alongside other types of Buy Now, Pay Later schemes.
“Borrowers should be careful as lenders can sometimes view this as financial desperation.
“I have seen Klarna used for very low-ticket items, which will certainly raise lender eyebrows.
“If customers are looking to borrow in the near future, they should remember that they are strangers knocking on the lender’s door for finance and the only story to be conveyed is that on paper regardless of the reasoning behind doing things.
“If in doubt, think twice and take advice.”
