PayPal co-founder Max Levchin gave remarkably honest response to accusations about his new start-up
The personal loan startup To affirm offers a simple proposition: buy things now, pay for them later. Service is not that different from a credit card, but consumers take out individual loans instead of a revolving line of credit. Pretty basic, right?
To his detractors, however, Affirm, who recently raised $ 200 million in a growth cycle, is engaged in something sinister, luring people into a financial trap by enticing them to buy things they cannot afford. CEO Max Levchin strongly disagrees with this interpretation, but accepts some of the blame for not creating a more precise perception.
“There are several layers to this that I haven’t been able to communicate over and over again,” said Levchin, who also co-founded PayPal. Inc. “I’m going to try anyway, because I try every time.” (He also mentioned that Affirm recently hired a communications manager to help him with this task, so Levchin won’t be left to flounder any longer.)
Here’s how Affirm works: You can borrow money to make a purchase at any store that integrates with Affirm (or at any store if you’re using the mobile “virtual card”). If Affirm’s proprietary credit model judges that you will be able to repay the amount, then you will be offered a loan. Over the next few months (up to a year), you need to make monthly payments including interest. APRs range from 10 to 30 percent.
The key things that differentiate Affirm from other credit options are that you get all the information up front, clearly spelled out, and the interest charged by the startup is straightforward rather than compound. When you make the initial buying decision, you know exactly how much you’ll end up paying to buy the product right now, instead of saving over several months. There is no additional charge.
Quite the contrary, Levchin said. Certainly, he thinks it is possible for a loan product to exploit the poor financial literacy of the average consumer. A desire to avoid doing this is exactly what sets Affirm apart, he says.
“Even simple interest loans are a little too hard for people to estimate,” he said. “The reason we quote everything we do in dollars is that we can basically say, look, you’re borrowing $ 1,000. You will have to bring in an additional $ 100 – therefore $ 1,100 – after 12 months. That’s all you got. I will never pay. You have no choice but to pay the minimum, to drag it out, can I do it in three years instead of one. “On the other hand, credit cards offer a kind of flexibility,” that’s why they’re so dangerous. “
Still, it’s easy to see the potential for abuse. Affirm’s credit model and its ongoing relationship with customers are intended to help the company determine if you are 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 is far from the only one that Affirm relies on.) That said, all the purchases you can technically allowing yourself is not a wise move.
A refrain in personal finance circles is “Never finance a luxury”. What if you lose your job and find yourself still struggling with high monthly payments for that gorgeous leather sofa? The company’s significant integration with luxury goods suppliers (think fashion and designer jewelry) has dominated public debate on Affirm.
Yes, in purely financial terms, funding an entirely frivolous article is a stupid thing to do. You take risks to satisfy your impatience and end up paying more than you would if you had been saving for a few months.
But what if you need a great costume for job interviews and can’t afford to buy it directly? What if your old mattress hurts your back and you can’t get a good night’s sleep? Is it wrong or foolish in these cases to buy an expensive item on credit? And is it wrong for Affirm to provide a financial product that people can independently choose to abuse, or should everyone else with reasonable reasons for using Affirm be left without service in order to protect the irresponsible?
Responding to this point, Levchin said, “I don’t think the only two choices are infinite flexibility versus infinite security.” Affirm is designed both to expand 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’ll be prescriptive as to how much they can safely borrow, what kind of schedule they can afford. But his will to judge stops there.
“What they borrow [the money] because, as long as it’s in our terms of service and we’re willing to lend in this category, we have no reason to say to you, “Oh, you shouldn’t buy sneakers, you shouldn’t buy other thing, ‘”he said. “It’s the nanny state or the oppression of freedom that I don’t want to be a part of.”
Levchin stressed that access to credit is so keenly desired by consumers, especially the lower end of the market, that they will pay seemingly outrageous amounts for it. “Payday Loans: This is a terrible thing, everyone hates it – for a good reason,” he said, “but people have completely misinterpreted that reason. “
Levchin assumed a one week loan of $ 100 with 100% interest, meaning that $ 200 would be owed to the lender. “To an ordinary person on the street who is in desperate need of $ 100 at present, and knows they’ll be paid within a week from today, that’s not a bad value proposition. ”Liquidity is important and money has time value; these are the characteristics why people pay interest in any loan or credit situation.
However: “What breaks the system, which really pushes people into debt permanently, is the ability to refinance your own loan,” Levchin said. If you can’t pay the lender the full $ 200 when it’s due and interest continues to pile up, you may end up in a hole. Levchin says his motivation is to provide a seamless alternative that doesn’t hijack human psychological blind spots.
He also sees Affirm as a long-term business and has explicitly designed the business model so that Affirm’s interests are aligned with those of its customers. Hence the lack of fees: Levchin doesn’t want Affirm to profit by granting loans to people who can’t really repay them. Its vision for the next decade is to expand to other financial products – potentially all financial products. Levchin wants Affirm to be a beloved tool that buyers will trust to manage their mortgages or investments, not one of resentment and suspicion.
If he and his team can get that message out to the public, it just might happen.
Correction: This article originally stated that Max Levchin co-founded Yelp as well as PayPal, which is incorrect. On the contrary, Levchin helped Yelp get started by providing its seed funding.