The financial services company Affirm is partnering with a growing number of retailers to offer installment loans with no hidden fees and surprises.
It may sound like a good alternative to credit cards, but money expert Clark Howard has a warning for you.
What you need to know about Affirm loans
Here’s an example of how Affirm works: Let’s say you find a vacation package on Expedia but don’t have the money to pay for it. The online lender instantly approves you for the loan and offers several payment plans.
Once you return from your trip, your first monthly payment will be due — with an interest rate as high as 30%!
The company says it charges no late fees, service fees or prepayment fees, but it reserves the right to refer delinquent accounts to a collection agency if you don’t pay your bill.
Since Affirm reports information to Experian, late or missed payments could also hurt your credit score.
The problem is that these instant loans encourage impulse spending — and it doesn’t have to be a pricey vacation! Affirm will spread payments over a period of 12 months for loans of $100 or more.
To put that in perspective, you could easily pay more than $15 in interest on just a $100 loan!
“You’re going to see this very heavily through the fall shopping season leading into Christmas with all kinds of items that you never could have imagined that you could finance, you’ll be able to do so,” Clark said on the radio show. “The far better alternative, if you don’t have the money, do layaway.”
One thing that works for my budget is delaying spending. Take a day or two to decide whether the purchase is a “want” or a “need” and only buy it if you can really afford it.