You've been browsing online and come across something you want — a pair of shoes, maybe, or a piece of furniture. But it also happens to cost a lot of money. Say, $1,000. This is more than you would typically spend on a single item, and the thought of unceremoniously dropping that much cash at once makes you a little queasy. But, you also really, really want those shoes, or that couch. So your mind gets to work.
What else could you do with $1,000? This is where people might split off into two camps. On the one hand, you might be the type of person who could quickly identify a vital expense that you should be funnelling your money into instead, like rent, or your student debts.
On the other hand, you could be the type of person who does math. $1,000 is what, 50 payments of $20? $20 is about the cost of one restaurant dinner, and there are 52 weeks in a year. So, if you only gave up one restaurant dinner per week, for less than a year, you could justify buying that thing you want? Sounds like a plan.
In recent years, a new type of business has cropped up to allow more customers to follow through with this second line of thought. These companies, which bill themselves as micro-lending platforms, partner with online retailers to offer loans at points of purchase, so that when it comes time to pay, your options for payment might include Visa, Mastercard, PayPal, or a loan, which you can pay off in installments as small as a couple of dollars per month over the course of several months or even years.
One such company that has gained wide popularity in recent years is Affirm. Launched in 2012 by Max Levchin, a co-founder of PayPal, the company has since expanded its roster of partnerships so that its services can be used to buy everything from mattresses (Casper) to flights (Expedia) to second-hand designer clothing (the RealReal). In March, brick-and-mortar stores also began offering Affirm as a payment option. The company has handed out more than $1 billion in loans since its launch.
Affirm, which is based in San Francisco, has no plans to extend its services to Canadian customers anytime soon, a company spokesperson confirmed in June. But some domestic companies are already offering installment options for small loans to Canadian consumers. Brim Financial, an upstart credit card provider, touts it as one of the features of its credit cards.
And, it’s likely that more companies will follow in Brim’s footsteps. Why? Avni Shah has some ideas. An assistant professor at the University of Toronto’s Rotman school of management, Shah studies consumer behavior — and can think of several reasons why micro loans appeal to a specifically millennial sensibility about debt, credit, and spending.
The problem with credit cards
Shah identifies a number of qualities about traditional credit channels that have long turned millennials off.
“Psychologically, we know that this thing is representative of debt,” Shah explains. “And there’s so much data, research, and advertising that basically says, ‘Hey. Avoid credit card debt.’”
And that means young people who are in need of credit might be drawn to alternative payment options like micro loans — even though, with APRs that range from 10% to 30%, the deals offered by companies like Affirm aren't always the most competitive.
When an idea is repeatedly beat into you, in other words, it’s hard to break free of its grasp. Having come of age during the 2009 recession, millennials can be especially sensitive to the stigma that credit cards carry — only one-in-three American millennials have a credit card, according to a Bankrate.com survey released in February. Meanwhile, the majority of older Americans carry plastic.
Debt is not a situation that you necessarily need to get into, but there are occasions in life that might call for it — like when you’re buying a home, or if you need to take advantage of a flight sale that will save you money in the long run, but do not yet have the cash to pay upfront.
The unpopularity of credit cards, says Shah, “creates this cottage industry of other channels for people to say, ‘Oh I’m supposed to avoid credit card debt, but I [can] take out these other loans.” That’s where micro loans come in.
Micro loans are less familiar
Again, it all comes down to learned associations. Cold, hard cash — meaning actual bills, and coins — is something that we equate with the concept of “money” — much more so than other forms of payment like credit or debit cards, or internet e-transfers. This, says Shah, is why “cash feels much more painful to spend than card.”
Because micro loans are still a relatively new concept, they can seem even more abstracted from money than debit or credit cards.
With cash, Shah says, “You take out your wallet, you have to take out the money, you get the change back... once the money is gone, you have to go the ATM. So there’s a lot of friction.”
Securing a traditional loan is also a process replete with friction, or obstacles, Shah adds: you have to go to a bank and fill out an application, and even if you don’t get a loan, the process will make a temporary dent in your credit score.
To get a hold of an Affirm loan, you do not have to do, or face, any of these things: you apply for a loan at a point of purchase, and, because the company only performs “soft” credit pulls as opposed to the “hard” pulls that major banks are accustomed to doing, your credit score won’t even be affected.
This ease of securing a micro loan, combined with the fact that we’ve not yet developed a habit to associate it with actual money, can make it feel less consequential than charging say, your debit card — which contributes to its appeal for those who have anxieties about debt.
They break your charges down into digestible chunks
This is what I called “math.” $1,000 is a lot of money. $20? Not so much.
When micro loan companies break down the total cost of a purchase down into smaller chunks, it’s easy to start feeling like the purchase costs only one of those chunks. That’s when you start making comparisons.
“If you say the item is $20 per month, I compare it to other items that I could’ve gotten for $20,” she says. These might include a dinner out, or a movie ticket, or a new book. So if the item you’re paying $20 a month for is, say, a pair of Christian Louboutins, you’ll probably think, “what else could I get that’s this nice for $20?” The answer will almost inevitably be nothing.
Your line of thinking would be different, however, if you weren’t able to pay in installments and had to either run a single charge on your credit card or pay in cash. In that scenario, you’d be confronted with the total cost of the purchase; a pair of Louboutins can run anywhere from several hundred to several thousand dollars.
That’s a lot harder to swallow: there’s plenty of other, probably more pressing things you could buy with such a large amount of money. But, it might make you more reluctant to go through with your purchase and save you money in the long run.