How Klarna Can Impact Your Mortgage Application

Klarna has changed the way UK shoppers shop not only online but also in-store. The idea of ‘splitting’ the cost of your purchase across three payments or paying in full in 30 days is appealing for those who want to make purchases without being hit with the full payment upfront or those waiting for payday.

Klarna now has 18 million UK customers and over 31,000 merchants. We saw a 20% rise in customers using a form of ‘Buy now pay later’ system at the checkout in 2023 than in 2022.

Understanding Klarna:

Klarna is a popular “Buy Now, Pay Later” service that allows consumers to make online purchases and defer payment until a later date. While Klarna can provide convenience and flexibility in managing your finances, it’s crucial to be aware of how it might affect your mortgage prospects.

Credit Score Impact:

One of the key factors lenders consider when evaluating mortgage applications is your credit score. Your credit score reflects your creditworthiness and financial responsibility. When you use Klarna, it can affect your credit score in several ways:

1. Credit Enquiry: When you apply for Klarna’s services, they may perform a credit check. Each credit enquiry can have a temporary negative impact on your credit score.
2. Increased Credit Utilisation: Klarna may increase your overall credit utilisation if you have outstanding balances with them. High credit utilization can negatively impact your credit score.
3. Missed Payments: Failing to make payments on time for Klarna purchases can result in late payment markers on your credit report, further damaging your credit score.

Debt-to-Income Ratio:

Mortgage lenders also evaluate your debt-to-income (DTI) ratio when assessing your application. DTI is the percentage of your monthly income that goes toward debt payments. Using Klarna excessively and accumulating Buy Now, Pay Later debts can increase your overall debt load, which in turn, may negatively impact your DTI ratio. A high DTI ratio can make it more challenging to qualify for a mortgage or secure a favourable interest rate.

Impact on Affordability:

Klarna’s flexible payment options can sometimes lead to a perception of affordability that may not align with the reality of your financial situation. Lenders use rigorous affordability assessments to determine whether you can comfortably meet your mortgage repayments. Excessive use of Klarna could lead lenders to question your ability to manage future mortgage payments effectively.

Managing Your Klarna Usage:

While using Klarna responsibly won’t necessarily hinder your mortgage application, it’s essential to be mindful of its potential impact on your financial profile. Here are some tips to manage your Klarna usage effectively:

1. Pay On Time: Always make payments for Klarna purchases on time to avoid late payment markers on your credit report.
2. Monitor Your Credit: Regularly check your credit report to ensure accuracy and address any discrepancies promptly.
3. Maintain Low Balances: Keep your Klarna balances low to minimize the impact on your credit utilisation.
4. Avoid Excessive Use: Use Klarna sparingly and avoid accumulating too much Buy Now, Pay Later debt.
5. Plan Your Mortgage Application: If you intend to apply for a mortgage soon, consider minimizing your use of Klarna in the months leading up to your application.

Using Klarna responsibly can help you maintain a healthy financial profile and minimize its impact on your mortgage application. It’s essential to be aware of how Klarna’s features, credit checks, and debt accumulation can affect your credit score, debt-to-income ratio, and overall affordability. At Coreco, we are here to guide you through the mortgage application process and help you make informed financial decisions. If you have any questions or need assistance with your mortgage application, please don’t hesitate to reach out to our experienced team of mortgage advisors. Your dream home is within reach, and we’re here to help you achieve it while maintaining your financial well-being.

Sources:

https://businesscloud.co.uk/news/klarna-hits-18-million-customers-in-the-uk/#:~:text=Klarna%2C%20the%20AI%2Dpowered%20global,customers%20and%20over%2031%2C000%20merchants.

https://www.statista.com/statistics/1372750/bnpl-transaction-value-in-uk/

Your home may be repossessed if you do not keep up repayments on your mortgage.

There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.

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