What is the benefit for a consumer to use this type of loan and then pay it back on time versus using a credit card and then paying the card back on time?
To me this seems like a new product that would target a different consumer than the one that makes payments on time. But I would like if someone challenges this view. Thanks!
I’ve used them several times, mostly because they are relatively cheap forms of credit for short durations (<12 months). I have plenty of credit available via traditional credit cards, but BNPL —- to this point —- haven’t reported usage rates to the bureaus.
Last summer our A/C went out. It ended up being about $4.5k to replace, and it was a heat emergency at the time. So I put the whole thing on Affirm for three months, at 0% interest. I paid about $50 in fees. That got us through the immediate emergency and gave me time to shop around for a better way to fund it.
I ended up taking out an auto loan with my credit union. The rates were much cheaper than a personal/unsecured loan, and I have three vehicles in the driveway without liens. The loan was for four years, but I’ve already paid it off.
In a tighter situation, BNPL not impacting your credit utilization rates is a big benefit.
> What is the benefit for a consumer to use this type of loan and then pay it back on time versus using a credit card and then paying the card back on time?
Slightly longer repayment time frames. (Multiple months instead of just one.)
CC gives me 30 days to pay it back interest free. BNPL gives me 2, 3, 6, or more months with very little or even no interest. If I know I'm not going to be able to pay it off in a month, I'd rather do a BNPL loan since it's so cheap. Additionally, you can have awful or no credit and still be approved for BNPL. It may be beneficial to have some repaid loans on your credit if you ruined your credit earlier in life like this credit builder CCs that have a super low limit.
I’ll add that I’ve found that the more you use Affirm at least, the better my options get.
I started by always choosing the shortest “plan”, which was 0% and no fees. After I’d paid off a few of those, I started getting offered plans of up to a year with no interest and very minimal fees.
Now, while I don’t use Affirm for luxury/unnecessary purchases, it offers better rates than any credit card I have, and better than a bank loan in many cases.
I have three Affirm loans right now, for a total of about $8k. All three of those are business expenses, and all three have increased profit in our business significantly more than they cost us.
I should have specified those durations are both interest-free. If you don't pay your credit card off after one month, it accrues interest at fairly high rates.
A CC gives 1% cash back. Your bank's savings give 4% interest. BNPL doesn't earn the cash back, but over a long term you make more in interest for some purchases.
For small puchases with short repayment periods? Not a clue.
That's an incomplete answer because it doesn't take total debt burden and history of payments into account over time. Score is fluid and should decrease while debt burden is high or increases. At the end though, score should improve slightly because they are slightly more trustworthy having repaid what was promised.
I successfully applied for a mortgage with ~30 credit cards open. Nobody batted an eye, or even commented on it. They looked at balances and credit score. Balances were almost all zero and credit score was excellent.
A hundred small loans that were all paid off on time over the last decade is extremely helpful getting you a mortgage, it doesn't hurt.
> Balances were almost all zero and credit score was excellent
Not the same.
> hundred small loans that were all paid off on time over the last decade is extremely helpful getting you a mortgage
Again, not the same.
Affirm can be worse than credit cards because credit cards are a single line of credit of X size. The people using it don’t realize that a bunch of tiny lines of credit add up to a larger one ultimately and they can find themselves overleveraged.
I wonder how it will be implemented. Because for me, Affirm shows my "purchasing power" almost like a credit card, even if it's currently utilized across multiple purchases. So I could see a difference between "making payments on an open balance of $X on an account with $Y purchasing power", even if those payments are subdivided into the original purchases, versus, "You have 7 open Affirm loans".
