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Consumers looking for a personal loan option have another one to consider in Affirm, which is a startup from PayPal co-founder Max Levchin. With Affirm, consumers can access a loan, a form of credit, to buy items at a store, which was originally interpreted to be similar to how a credit card works.
But Levchin has pointed out there are important differences between an Affirm loan and credit cards.
Affirm Differences Compared to a Credit Card
Although Levchin has faced criticism for creating a credit card-like loan that may encourage people to buy items they don’t need and can’t afford to pay for, Levchin has painted Affirm as being a bit different than a credit card. For one thing, the fees are openly disclosed, so consumers aren’t ambushed by higher than anticipated compounding interest.
And unlike credit cards, Affirm is aimed at people who are more likely to afford the required monthly payments. Affirm is also different than the credit card experience because it doesn’t give consumers a continuous line of credit they can use repeatedly – it’s just a single personal loan.
Although Affirm definitely has its critics, Levchin said he isn’t out to trick consumers into spending more than they can afford or saddling them with long-lasting debt.
“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,” Levchin said to www.inc.com.
Who Uses Affirm?
Generation X and Millennials are the customers who most frequently use Affirm. Younger consumers have seen how carrying high credit card balances affected their older relatives, and they are less likely to want to have much credit card debt.
To use Affirm, consumers apply for an Affirm loan at a store affiliated with the company. Consumers can also use any store if they opt to use a virtual card instead. The credit model has to decide they’ll be able to make their payments – if not, a loan won’t be extended.
Consumers have, at most, a year to pay off the loan. During that time, each payment will have interest factored in. The annual percentage rate can be steep, going from as low as 10 percent to as high as 30 percent. But, unlike credit cards, the interest isn’t compounded.
Just like a credit card, an Affirm loan can help customers build a solid credit history that may help them someday secure bigger loans for items they desperately need, such as a car to get to work or a home mortgage. However, just like a credit card, mishandling this debt can lead to serious consequences.
While Affirm is still in its early years, eventually Levchin would like to see Affirm branch out into other lending arenas other than personal loans, including investments and mortgages.
Affirm is currently valued at somewhere between $1.5 and $2 billion and has recently raised $200 million in funding, with investors banking on Levchin’s proven track record with PayPal. The funding it received will help it distribute more loans. By April 2017, Affirm had secured approximately $1 billion in loans to one million consumers.
Author: Andrew Rombach