Pay-in-instalments companies like Klarna are being criticised for pushing their customers into unmanageable debt.
A cute holiday fit. The latest Xbox game. Some trendy home furnishings. There may be downsides to consumerism, but the happiness that can be gained by splurging on something new is undeniable. But of course stuff costs money, and how much money we have to spend doesn’t always correlate neatly with what we want to spend. For financial companies, that mismatch presents a business opportunity: to offer out loans.
One such company is Klarna, a ‘buy now pay later’ (BNPL) firm. The BNPL model is popular: Klarna has 147 million active customers worldwide. But not everyone is a fan. Barclays, the bank, and StepChange, a debt charity, have accused BNPL companies like Klarna of getting hundreds of thousands of Brits into ‘unmanageable’ debt. Klarna says this stance is hypocritical, because Barclays itself offers BNPL loans and, unlike Klarna, it charges customers interest on some of them. The UK government has also waded into the row, and announced it will soon be targeting BNPL lending with tighter regulations.
The upshot of all this is that many consumers have been left confused about whether BNPL is a good or bad financial product to use. Part of the problem is that a lot of the conversations about it muddle two distinct queries. The first is about the economic impact of taking out any debt. The second is how various BNPL products compare to other ways of taking out debt.
Personal debt often comes with negative associations. One quarter of Brits who have some say they lose sleep thinking about what they owe. Half of UK adults say they would only consider themselves ‘financially free’ if they owed nothing. Economists, however, often have a more sanguine view. They argue that taking out debt can be a smart move if it allows you to make larger economic gains in the longer term than you could have achieved without the credit.
Take student loans. Having a degree is often correlated with significantly higher lifetime earnings and more career choice, so financially these extra earnings can outweigh the cost of paying back a loan, even with interest. Loans can facilitate other types of economic benefits too; think of the health and happiness boost that comes with, say, being able to fix a boiler immediately rather than waiting till payday. Even examples that sound more frivolous, such as being able to buy tickets or a dream outfit for an important pre-payday event, can create tangible wellbeing benefits.
For instances where taking out debt would end up being a net positive for someone, there are appealing features about the Klarna-esq system, because by not charging interest rates or other fees, Klarna lowers the cost of taking out a loan and makes debt easier to afford for many people. Specifically, it may make purchases more affordable for people lower down the socioeconomic ladder, as richer people are more likely to have the cash upfront. But of course there is an obvious issue with this line of thinking: what happens when the economic benefits of taking out a loan are lower than the costs? For example, what happens when people can’t afford to repay the loan?
Klarna’s model does remove one of the worst aspects of this situation, where interest rates and late fees mean that overstretched borrowers can quickly end up in spiralling debt, which becomes more and more unaffordable. But even without this aspect, carrying debt you can’t pay off often comes with negative economic consequences for both people’s finances and their wellbeing. Plus, a major part of the beef some people - including the UK government - have with companies like Klarna is that they think BNPL firms encourage people to take out debt they otherwise wouldn’t have, in order to buy stuff they don’t need and don’t even want that much; think young people trying to keep up with every latest fashion trend. By this reading, Klarna isn’t facilitating investments with big economic payoffs, but simply encouraging rampant - and often unaffordable - consumerism.
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