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People Using Micro-Loans to Pay for Groceries and Gas

President Biden did say that we have a strong economy and job market. However, it is questionable whether he actually read this off of a teleprompter.

Image Credit: pasja1000

Americans are trying to find ways to keep their household afloat amid rising gas and grocery prices. Recently, they've turned to short-term loans in order to finance their needs as the economy continues to recover.

As Bloomberg reports, Swedish fintech company Klarna Bank - whose bread and butter has been loans for smartphones and other consumer electronics - has seen a flood of applications for gas and staples such as food.

They provide interest-free loans that allow people to make payments over time and gives retailers a small fee for each purchase. They also earn money off of interest on long-term loans.

Linda Cruz, a mother of four from a small town near San Antonio, Texas, started out using Klarna’s interest-free loans for occasional, large purchases -- like a new air conditioning unit after hers died during a heat wave last summer. But as prices started to rise for essentials, she started using it for groceries, too.

Bloomberg states that Cruz, 37, who works in the bail bonds industry and is this household's primary wage earner finds Klarna helpful to manage her finances because she gets paid bi-weekly.

Although their post-money valuation has dropped, Klarna closed an $800m round of financing and still seems to be going strong. The article could simply be trying to push a new niche for the 17-year old company and has “embraced the shift in the way people use its credit.”

Klarna, run by co-founder and Chief Executive Officer Sebastian Siemiatkowski, has struck partnerships with gas companies such as Chevron Corp. and developed an app that can be used in physical stores at retailers, like Walmart Inc. and Target Corp., as it hunts for new users. But interest rates for its own debt are rising and Klarna’s burning through hundreds of millions of dollars per quarter, making the company more vulnerable to defaults from customers living paycheck-to-paycheck.

"This puts pressure on the Klarna model," according to Warwick Business School professor John Colley. The study found that as the disposable wealth of the company's users shrinks, it may start facing problems.

According to this report, Klarna’s drop in valuation is linked to the meltdown in capital markets - though notes that Klarna is particularly vulnerable due to persistently high rates of inflation.

A spokesperson told Bloomberg that they may have higher annual credit losses due to an increase in new members.

According to Sue Anderson, a spokesperson for StepChange Debt Charity & Barclays bank, you should be worried about the risk of building up debt and “36% of users” believe that micro-loans could exacerbate their debt problems.

“People don’t see it in the same way they see other types of borrowing,” Anderson then continued, adding that: “It is marketed as interest-free, but that doesn’t mean it is risk free.”

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