A PayPal founder could not get a car loan, so he built a lender with no late fees
Even after PayPal made him rich and famous, Max Levchin's ruined credit followed him, until friends joked about it and lenders called his fix insane.
Business Breakdowns · Affirm: The Internet’s American Express - [Business Breakdowns, EP.249]The convertible was supposed to impress his girlfriend. Max Levchin, a well-known PayPal co-founder, flew to Los Angeles after PayPal's stock market debut to buy the car for her, and he walked into the dealership in his early 20s.
A magazine he could pick up at the newsstand had his face on the front page. But when the dealer checked his credit, the loan was declined because his score was so bad. Levchin had to sit in the showroom and wait until money arrived by wire before he could leave with the car.
He had earned the bad score the hard way. Levchin had grown up in the Soviet Union, where he said he had no real concept of credit cards or how they worked. At university in the United States, he started funding his early startups with credit cards, paid them back late, and badly damaged his credit rating without quite realizing what he was doing.
That damage followed him even after success. Though he had built PayPal alongside figures like Elon Musk and Peter Thiel, his friends teased him for years by arranging with restaurant staff to act as if his payment had failed.
About ten years after leaving PayPal, Levchin started a new lender, Affirm. The company's stated mission was delivering "honest financial products that improve lives," without charging fees for late payment, without letting balances compound, without deferring interest, and without fine print.
Lenders thought the idea was crazy. Those penalties and confusing terms were where much of the industry's profit came from.
Questions people ask
How is Affirm different from a regular credit card?
A credit card gives you a standing line you can borrow against, with a variable rate and a balance that can roll over and compound. Affirm approves each purchase separately for a fixed rate and a fixed schedule that is designed to bring the balance to zero.
How does Affirm make money if it does not charge late fees?
Affirm charges merchants a fee for sending them customers, and it earns interest from shoppers on longer term loans. Because the terms are fixed up front, it does not need penalties to make the math work, though it can still lose money if borrowers do not repay.
Why did other lenders think no late fees was such a crazy idea?
Late fees, compounding interest, and deferred interest can turn a small missed payment into months or years of extra charges. That makes them highly profitable for lenders, which is why giving them up seemed radical to industry insiders.