Klarna Users Struggle to Repay Loans as US Consumer Debt Surges
A growing number of customers using Klarna, a popular "buy now, pay later" service, are finding it difficult to pay back the installment loans they take out. According to the Swedish company, its consumer credit losses swelled by 17% in the first quarter from the same period a year earlier, hitting $136 million. This increase in delinquencies comes as the US consumer debt burden reaches a record high.
The news was announced as Klarna reported its financial results for the first quarter, which showed that net losses had doubled despite a growing user base and revenue. A Klarna spokesperson attributed the rise in consumer credit losses to various factors, but pointed out that the company’s credit losses as a share of the total sum it loaned out, or "gross merchandise value," had only risen slightly from 0.51% to 0.54%. "This doesn’t tell you much about the U.S. consumer," the spokesperson said. According to NBC News, which first reported on the surge in Klarna’s consumer credit losses, the company’s struggles with delinquencies are part of a broader trend in the "buy now, pay later" industry.
The issue of consumers struggling to repay loans is not unique to Klarna. According to a survey conducted by the credit platform LendingTree, 41% of users said they paid late within the last year, up from 34% the previous year. Furthermore, at least a quarter of BNPL users took out loans to pay for groceries, up from 14% in the previous year. As NBC News reports, the debt strain among BNPL customers coincides with broader signs of stretched household finances. The Federal Reserve Bank of New York reported that US consumer debt rose by $167 billion to hit a record $18.2 trillion in the first quarter.
The surge in consumer debt comes as many households are feeling the pinch of rising prices. Household spending rose 4.5% in April from a year earlier, down somewhat from the 4.6% annual uptick as of December, according to a New York Fed survey released this month. Much of that was driven by a pullback among households making less than $100,000 a year, as shoppers become more cautious about big-ticket purchases. As NBC News notes, average household spending growth remains far hotter than before the pandemic.
Despite these concerns, BNPL services continue to extend their reach throughout the consumer economy. Klarna recently became the exclusive BNPL provider for Walmart, and in March, it joined forces with food delivery service DoorDash. According to NBC News, these efforts have made near-instant access to credit increasingly ubiquitous for even small-dollar, routine purchases.
The Trump administration has been walking back efforts to tighten regulation of BNPL services, even as they become a growing source of financial difficulties for consumers. Earlier this month, the Consumer Financial Protection Bureau said it would no longer enforce a Biden-era rule treating BNPL providers as credit card lenders, which had required stricter protections around disclosures, customer disputes, and refund processing. The rule had been issued as "guidance," a practice that had become more common under then-CFPB Director Rohit Chopra. Some consumer finance experts say that has made it easier for the agency’s current leadership to roll back recent policies.
As reported by NBC News, consumer finance experts are warning that the lack of regulation could lead to further financial difficulties for consumers. With Klarna and other BNPL services continuing to grow, it remains to be seen how these companies will address the issue of delinquencies and work to support their customers in repaying their loans. The spokesperson for Klarna said that the company is committed to providing a responsible and sustainable way for consumers to pay for purchases, but it remains to be seen how effective these efforts will be in addressing the growing problem of consumer debt.
In the meantime, consumers are advised to be cautious when using BNPL services and to carefully review the terms and conditions of any loan before signing up. As NBC News reports, it is essential for consumers to understand the potential risks and consequences of using these services, including the possibility of late fees, interest charges, and damage to their credit score. By being informed and vigilant, consumers can make more informed decisions about their financial lives and avoid potential pitfalls.
