A group of fintech firms are changing the way consumers borrow

JUST UNDER $1.1trn of revolving consumer debt—bills racked up on credit cards—was outstanding in America at the end of August. It is a dangerous type of debt. High interest rates and low minimum repayments mean balances can quickly balloon. But a group of fintech firms are growing fast by offering consumers an alternative.

Affirm, based in San Francisco, was founded in 2012 by Max Levchin, a serial entrepreneur who co-founded PayPal. Rather than offer a line of credit to be used at will, like a credit card, it gives loans of up to $15,000 for specific purchases, to be repaid in pre-agreed instalments. When a shopper makes an online purchase with one of its retail partners, for example Peloton, a seller of fancy exercise bikes, Affirm appears as a payment option at checkout. It does a roaring trade in financing for engagement rings and laptops.

Affirm makes some of its money from interchange fees of 3-6% paid by these merchants. On a three-month loan that works out at about as much as if the item had been bought with a credit card and paid off over the same period. That allows it to offer short-term loans at zero interest. On longer-term loans the cost is fixed when the loan is taken out and does not accrue as with cred it cards, even if a payment is late.

The model for such firms was Klarna, which was founded in...

via The Economist: Finance and economics Business Feeds

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