Is 0% APR loan from Affirm a good deal?

Short answer: No.

But it is fairly subtle as to why.

Background

I recently was making a big online purchase, and the merchant offered “12-month 0% APR financing” of the purchase through Affirm.

I thought “why pay for something now if I can pay for it in 12 months?” and decided to look into this.  Since I bothered to think through this, I thought I’d post the analysis in case someone else can benefit.

Analysis

First, the deal seems to be legit.  Going through the process, it genuinely appears that they’ll do the transaction as a 12-month loan with 0% APR instead of upfront payment. Looking at the structure of the payment plan, you make equal payments monthly. So in reality, you’re really borrowing for a weighted-average of 6 months.

However, even a credit card that you pay off in full each month is borrowing for ~1.5 months in the usual case. On average, you are ~15 days from when your statement next closes; and then the payment is due 30 days after that.  So you’re already borrowing the

Benefits:

  • time-value of your month: 1%. This is return earned by your money over the time between when you pay back the loan (~6 months) and when you would otherwise pay for it (~1.5 months).  Assume 3% annual after-tax return, which is arguably optimistic at the moment. Doing the math : 6 – 1.5 = 4.5 months that you’re really earning that return for, so you’d expect to earn 4.5/12 = ~1% return on the value of the purchase.

Costs:

  • Forgone credit card rewards: 2%. Because you’ll pay the Affirm loan off with ACH transfers, rather than a credit card.
  • Forgone credit card protections: ??. purchase protection, disputes, etc.
  • Value of your time/energy: ??. Marginal complexity/hassle for you to administer a loan in addition to your credit card.

In summary, if you can pay for the purchase on a credit card with decent rewards that you’ll pay off in full, you lose money from this loan in practice. Roughly, 1% of the value – depending on your card’s reward value and your beliefs about after-tax rate-of-return.

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