We often talk about how tightening credit standards have changed the face of lending. What’s less discussed is the effect the Great Recession has had on consumers
American credit card debt, currently amounting to around $808 billion, is one of the easiest types of credit to overextend yourself on. Not coincidentally, many younger Americans are avoiding credit cards at a higher rate. Fewer than one-in-three Millenials claim to have a credit card, for example.
That’s where Affirm comes in. Companies like Affirm count on the fact that cardless consumers will still face situations where they need to buy something that they can’t afford.
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How Does Affirm Work?
Affirm offers point-of-sale (POS) financing. This isn’t a new form of lending, but rather a technology-assisted reinvention of an old lending model.
Here’s an example of how the process works:
You decide you can’t possibly live without the hottest new gaming console a moment longer, so you add it to your online shopping cart and proceed to checkout. Among your options to pay are the usual credit and debit cards, along with payment processors like PayPal. But this merchant also provides an option to use Affirm, which allows you to take out a short-term loan on the spot to finance the exact cost of your purchase. You’re given the choice of paying back the loan over the course of three, six, or 12 months. Affirm then shows you how much money you’ll be paying back, expressed as both an interest rate and a dollar amount. If you accept, your purchase is processed.
Congratulations, you’re the proud owner of a new game console…and a short-term loan!
Isn’t That Just How A Credit Card Works?
In a sense, sure. Revolving lines of credit and short-term loans have a lot in common. In both cases, you’re “taking out” an amount of money equal to the cost of your purchase, which you’ll be paying back (hopefully) within the next few months. Additionally, in both cases, creditors aren’t concerned with what you’re buying, just the amount you’re requesting/using.
But there are some important differences.
The big one is that Affirm evaluates each loan separately rather than as a line of credit. You won’t be cut off when you hit a specified credit limit, but your loan may be denied if you missed payments on other Affirm loans or if they believe you’ve overextended yourself. Additionally, Affirm may not always cover the entirety of your purchase; you may have to make a downpayment.
You can expect APRs between 10% – 30% with Affirm. The average credit card APR is around 15%, so you can easily end up paying more than you would with a credit card. Loans are capped at $10,000.
Why Would I Want To Use Affirm Instead Of A Credit Card?
The short answer is that it’s mostly a matter of your own spending psychology, but there are some specific reasons why you might choose a POS loan over a credit card purchase.
You Have Poor Credit
Credit card companies aren’t quite as conservative as they were during the financial crisis, but many shoppers may still find themselves unable to access credit. Or they may only qualify for a very low credit limit. POS lenders take credit into account (Affirm, for example, does a soft pull on your credit when you first signup), but don’t weight it as heavily.
You’ve Maxed Out Your Credit Cards
While you may want to reconsider taking on more debt, there’s nothing really stopping you from utilizing both credit cards and POS loans.
It’s not unusual for credit card companies to offer 0% APR introductory rates. PoS loans also come with 0% APR offers, but they’re a little different. Instead of being attached to new accounts, Affirm will sometimes offer 0% APRs at specific partner stores.
You Like The Way The Loans Are Structured
Credit cards offer enormous flexibility in how they’re repaid. Other than making the required minimum monthly payment, you can throw any amount of money you want at your balance every month. At the same time, it’s not necessarily clear how much you should be paying to make a good dent in your balance. A POS loan has a prescribed end and tells you the amount of money you need to pay each month in order to meet it.
There’s a lot of diversity in the types of financing being offered to individuals and businesses these days. POS loans fit into the broader alternative lending trends. That is to say, they’re fast, easy, and more expensive. Still, they do provide options for borrowers who have a hard time otherwise accessing credit, or who wish to avoid credit cards’ minimum payment trap.
Meanwhile, if you’re a business that prefers old-fashioned credit cards, why not take a look at our business credit card comparison chart?