The personal loans startup Affirm offers a straightforward proposition: Buy things now, pay for them later. The service is not so different from a credit card, but consumers take out individual loans instead of a revolving line of credit. Pretty basic, right?
To its critics, though, Affirm, which recently raised $200 million in a growth round, is engaged in something sinister, luring people into a financial trap by enticing them to buy things they can't afford. CEO Max Levchin doesn't agree with that interpretation at all, but he does accept some of the blame for not creating a more accurate perception.
"There are several layers to this which I have failed to communicate over and over again," Levchin, who also co-founded PayPal, told Inc. "I'll try it anyway, because I try every time." (He also mentioned that Affirm recently hired a director of communications to help with this task, so Levchin won't be left to flounder much longer.)
Here's how Affirm works: You can borrow money to make a purchase at any store that integrates with Affirm (or any store at all if you use the mobile "virtual card"). If Affirm's proprietary credit model judges that you'll be able to pay back the sum, then you're offered a loan. During the next several months -- up to a year -- you're expected to make monthly payments, which include interest. The APRs range from 10 to 30 percent.
The key things that differentiate Affirm from other credit options are that you get all of the information up front, stated plainly, and the interest charged by the startup is simple rather than compounding. When you make the initial purchasing decision, you know exactly how much extra you will end up paying to buy the product right now, instead of saving up over several months. There are no additional fees.
Quite the opposite, said Levchin. To be sure, he thinks it's possible for a lending product to exploit the low financial literacy of the average consumer. A desire to avoid doing that is exactly what differentiates Affirm, he says.
"Even simple interest loans are kind of too hard for people to estimate," he said. "The reason we quote everything we do in dollars is so that we can basically say: Look, you're borrowing $1,000. You will need to bring back $100 extra -- so, $1,100 -- after 12 months. That is all you'll ever pay. You are not given a choice of let's just pay the minimum, let's drag it out, can I do it in three years instead of one." On the other hand, credit cards offer than kind of flexibility, "which is why they're so dangerous."
Still, it's easy to see the potential for misuse. Affirm's credit model and its ongoing relationship with customers are intended to help the company suss out whether you're borrowing more than you can actually afford. (Levchin mentioned that a person's debt-to-income ratio is still the most reliable predictor, although it's far from the only one that Affirm relies on.) That said, not every purchase that you can technically afford is a wise decision.
A refrain in personal finance circles is "Never finance a luxury." What if you lose your job and find that you're still saddled with high monthly payments for that beautiful leather couch? The company's prominent integration with purveyors of luxury goods (think designer fashion and jewelry) has dominated public discussion of Affirm.
Yes, in pure financial terms, financing an entirely frivolous item is a dumb thing to do. You take on risk to satisfy your impatience, and end up paying more than you would if you saved for a couple of months.
But what if you need a nice suit for job interviews and can't afford to buy it outright? What if your old mattress is hurting your back and you can't get a good night's sleep? Is it wrong or stupid, in those cases, to buy a big-ticket item on credit? And is it wrong for Affirm to provide a financial product that people can make an independent choice to abuse, or should all of the other people with sensible reasons to use Affirm remain unserved in order to protect the irresponsible?
In response to this point, Levchin said, "I don't think that the only two choices are infinite flexibility versus infinite safety." Affirm is designed to both broaden access to credit, with its non-FICO assessment process, and to help people use it responsibly. Levchin explained, "I will strictly judge [loan applicants'] credit. I will be prescriptive as to how much they can borrow safely, what kind of schedule they can afford." But his willingness to judge stops there.
"What they're borrowing [the money] for, so long as it's in our terms of service and we are willing to lend into that category, we don't have any business telling you, 'Oh, you shouldn't be buying sneakers, you shouldn't be buying something else,'" he said. "That's the nanny state or the oppression of liberty that I don't want to be any part of."
Levchin pointed out that access to credit is so keenly desired by consumers, especially on the low end, that they'll pay seemingly outrageous amounts for it. "Payday lending: It's a terrible thing, everybody hates it -- for good reason," he said, "but people completely misread what that reason is."
Levchin gave the hypothetical of a weeklong loan for $100 with 100 percent interest, meaning that $200 would be due back to the lender. "To a regular person on the street who is in desperate need of $100 right now, and knows that they will get paid a week from today, it's not a bad value proposition." Liquidity is important and money has time value; those are the features for which people pay interest in any lending or credit situation.
However: "The thing that breaks the system, that really pushes people into permanent debt, is the ability to refinance your own loan," Levchin said. If you can't pay the lender the entire $200 when it's due, and the interest keeps compounding, you can find yourself in a hole. Levchin says his motivation is to provide a transparent alternative that doesn't hijack human psychological blind spots.
He also sees Affirm as a long-term company, and explicitly designed the business model so that Affirm's interests are aligned with its customers. Hence the lack of fees: Levchin doesn't want Affirm to profit from extending loans to people who can't really pay them back. His vision for the next decade is to expand into other financial products -- potentially every financial product. Levchin wants Affirm to be a beloved tool that shoppers will eventually trust to handle their mortgages or investments, not a nexus of resentment and suspicion.
If he and his team can get that message through to the public, it just might happen.
Correction: This article originally indicated that Max Levchin co-founded Yelp as well as PayPal, which is incorrect. Rather, Levchin helped Yelp get started by providing its initial funding.