Lending startup Affirm may be popular, but its loans are a problem

Online payment platform Affirm has skyrocketed in popularity recently, drawing $275 million from venture capital investors. The company operates by allowing users to take out loans at check-out at select online stores. In this way, Affirm has been marketing itself as a better alternative payment method to credit cards by being easier, quicker, and more transparent. This promise has raised eyebrows among many personal finance experts.

Affirm caters to the worst behavior of credit card users – namely, carrying balances. Giving a person the ability to sign up for a 3, 6, or 12-month payment plan isn’t fixing anything about the dangers of credit card misuse. Just because users are aware of the APR they will pay on a purchase, or have a set payment plan put before them, doesn’t mean they should be taking out loans or relying on credit in the first place.

For small purchases, credit should always be thought of as a tool, not a lifeline. Treating it as the latter will sink consumers in debt and a sea of interest charges. Consumers should aim to only make purchases on a credit card when they know they can pay it off in full at the end of the month. Financing purchases of jewelry, makeup, or longboards is not a good idea.

Affirm is mainly targeting millennials and is hoping to fill the void left by this age group’s mistrust of credit cards. Recent studies have shown that 40 percent of young adults say they have no interest in using a credit card – a mentality that has been, in part, explained by the effects of growing up during the recent recession.

What makes Affirm a potentially dangerous product is the fact that it gives consumers immediate ability to finance purchases they shouldn’t be taking out loans for in the first place.

If you choose to make a purchase using Affirm, your interest may end up being significantly worse than using a credit card – almost certainly if you choose a 12-month payment plan. Below we graphed the difference between the amount of interest you would pay on an $850 Casper mattress. The example given consists of monthly payments of $78.74 for 12 months. For the purposes of the comparison, we applied the average credit card APR of 15 percent.

The data for the above figures was taken directly from the example product purchase on Affirm’s website. It translates to an APR of approximately 20.28 percent. This is the “middle point” interest you can pay using the platform. Your APR with Affirm can vary between 10 percent and 30 percent. Most credit cards will not charge you an APR of 30 percent unless you miss payments and the “Penalty APR” kicks in.

According to the company, the average loan amount an Affirm user takes on is $400, and the majority of its clients choose to finance their purchase for nine months. This does not bode well for the wallets of its user base. If Affirm consumers are taking on close to a year-long payment plan to cover the cost of small purchases, they are almost certainly paying a great deal of interest. While there are no early repayment costs, users will still be on the hook to pay all the interest up until the day they pay off their loan. This also occurs at an unfavorable APR, which would have been better had they elected a shorter financing term.

Max Levchin, Affirm’s founder, is on record as saying he hopes one day the platform will grow to offer loans on auto purchases and mortgages. These are much more reasonable investments, since many consumers simply don’t have the capital to purchase things like a home or a car in full.

It’s not surprising the company was able to attract investors. The model is highly profitable, since its targets people who can’t afford a purchase and will go as far as getting a loan to finance it. While consumers may be aware of the price they will pay for this behavior, they may not realize the bad behavior that Affirm is reinforcing.

Robert Harrow is an analyst for ValuePenguin.com, a research and personal finance website.

[This story originally appeared on ValuePenguin.]