If you’ve ever bought a Casper mattress or plane tickets on Expedia, chances are you’ve heard of Affirm, a financial services startup that lets you pay for purchases in fixed installments. Affirm may be a relatively new company, but the service it offers isn’t particularly innovative: It’s taking the concept of layaway, a type of no-interest payment plan that became popular during the Great Depression that lets you pay for things in fixed installments and take them home once you’ve paid for it in full, and twisting it for millennials. Unlike layaway, Affirm delivers your purchases instantly — but the cost of instant gratification is interest rates as high as 30 percent. The service is basically a cross between credit cards and layaway, combining the worst aspects of both. And if there’s one thing tech startups have mastered, it’s getting investors to give them millions of dollars to recreate things that already exist, like taxis, ordering food from restaurants, and now, subprime loans.
Got this ad on Instagram for $393 cotton pants available via subprime loan.— Susie Cagle (@susie_c) June 16, 2017
Tell me again, what are Millennials killing? pic.twitter.com/Z3YLlmCsjk
Affirm, which was founded in 2012 by PayPal cofounder Max Levchin, bills itself as a “transparent and honest” alternative to credit cards that “make[s] complex things,” like personal finance, “simple and clear.” (The Wall Street Journal reported last year that Affirm had raised around $525 million in venture funding.) Its target market is “consumers under-served — or not served — by FICO credit scoring,” specifically millennials with low incomes, young credit, and expensive tastes. Most lenders use your FICO credit score, which is determined by how long you’ve had credit, your payment history, the types of credit you use, and how much debt you already have, to determine whether you’re eligible for a loan or a line of credit. Consumers who don’t have extensive credit histories are more likely to be denied for loans or to receive low credit limits, which is where Affirm steps in.
Though Affirm bills itself as the anti-credit card, it’s more akin to a digital version of walking into a bank and asking for a loan. Affirm’s mission, according to their website, is to “deliver honest financial products to improve lives.” An Affirm spokesperson told The Outline that the company uses their own algorithm that relies on “a host of public and private databases,” rather than a credit score, to determine a person’s intent and ability to repay. Affirm approves “126 percent more people than the industry average,” the spokesperson said, and the loans are doled out by Affirm’s venture capital-funded banking partner, the New Jersey-based Cross River Bank.
More than 1,000 online retailers let people finance their purchase with Affirm instead of paying in full with a debit card or charging it to a credit card. Expedia sells its Affirm partnership as a way for anyone to book their “dream vacation,” including millennials “on a tight budget.” The section of their website announcing their partnership with Affirm is basically a millennial-baiting word salad:
Expedia recognizes there’s no one-size-fits-all approach to budgeting for vacation so next time you’ve caught the wanderlust bug or need to get home for Christmas but are struggling to pay for those flight and hotel reservations upfront, you can now breathe a sigh of relief.
“These are not things people should be financing with a loan and paying interest for,” Robert Harrow, a credit card analyst at ValuePenguin, told The Outline. “They’re almost enabling impulse buys from people. If they’re positioning themselves as an alternative to credit cards or banking, they shouldn’t be. They’re enabling somewhat risky behavior on the part of clients.”
Once your Affirm loan is approved, you can choose to pay it off in 3, 6, or 12 months, and interest rates range from 10 to 30 percent. The average customer takes out a $750 loan with a 21-percent interest rate and pays it back in nine months. Compared to credit cards, which have an average APR of 17 percent, and personal loans that typically have interest rates ranging from 5 to 36 percent, Affirm isn’t a particularly good deal. The appeal lies in who they give loans to: Young people who haven’t built up credit, or, more cynically, who are afraid of racking up credit card debt but are somehow convinced taking out a personal loan to buy a pair of pants is any different. Affirm is positioning itself as an “honest” alternative to credit cards and other forms of debt because there are no hidden fees, just high interest rates.
“At Affirm, we believe the financial industry desperately needs reinvention,” the company’s mission statement reads. “Not only is the core infrastructure built with technology from the 1970s, but a dwindling number of people can say ‘I trust my bank to look out for me.’ It doesn’t have to be this way.”
Once you look past all the startup jargon, Affirm is doing the same thing as any traditional bank.
They’re not wrong. Millennials, who came of age during the most devastating economic crisis since the Great Depression and who on average earn less money than their parents, aren’t too fond of banks. For many young people, banks represent foreclosures and student debt that will never go away. According to a 2014 survey, four of millennials’ 10 most hated brands are banks, and bizarrely enough, 71 percent of millennials “would rather go to the dentist than listen to anything big banks have to say.” Though Affirm positions itself as an alternative to big banks, one of its biggest backers is Morgan Stanley, which gave the company a $100 million loan last year.
Affirm has already figured this out. In glowing interviews with TechCrunch, Inc, and other outlets, Levchin talks about how transparency and honesty — qualities not typically associated with banks — are at the core of Affirm’s mission. Unlike credit card companies and traditional lenders, Affirm only charges simple interest and doesn’t offer revolving lines of credit, making it easier to understand for a generation that doesn’t understand or trust personal finance. Once you look past all the startup jargon, Affirm is doing the same thing as any traditional bank: Giving out high-interest loans to people who wouldn’t typically qualify and don’t always have the means to pay them back. To their credit, Harrow says, “this isn’t on the level of payday loans,” which he says often carry interest rates of 50 or 60 percent. “They are providing a service, I just think people need to be careful.”
If you default on your Affirm loan, you get put under collections, just like you would with any other credit card or personal loan. (Affirm told The Outline their loans “aren’t sold to a third-party collections,” and that the company oversees all of the collections.) Affirm wouldn’t disclose their default rate, but they said it’s “lower than the industry standard. (Credit card default rates were at 2.74 percent earlier this year, and personal loan default rates are at 3.54 percent as of 2015.)
Kimberly Greenberger, an analyst at Morgan Stanley, told Business Insider last year that young people are still shaking off the psychological effects of growing up during the 2008 financial crisis. “I think we have got a very significant psychological scar from this Great Recession,” Greenberger said. “One in five households at the time were severely negatively impacted by that event. And, if you think about the children in that house and how the length and depth of that recession really impacted people, I think you have an entire generation with permanently changed spending habits.”
The reason Affirm has been so successful — the company recently issued its one-millionth loan, and the Wall Street Journal reported yesterday that Affirm may soon partner with Wal-Mart — is because they’ve figured out how to appeal to young people’s collective neuroses about debt and money. Affirm, like so many other startups, built a sleek, easy-to-use product to disrupt traditional industries and empower people to buy things they can’t afford and don’t always need. If you don’t have a credit card and really want a new mattress, maybe Affirm is right for you. But please don’t take out a subprime loan to buy a pair of pants.