Would You Take Out a Loan for a Pair of Jeans? (2017) | Hacker News Reader

Would You Take Out a Loan for a Pair of Jeans? (2017)

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23 pointsmooreds74 comments

These companies are all terrible. Unless you're buying a car or a house which often (but not always) require financing, if you don't have the cash in your account today to buy a product in full, you can't afford it.

There are other concerns on what "afford" means (ie do I have the budget for this or is my cash for something else), but if the answer to the question is no, you can't buy that item yet.

The part missing from this concern: taking out 0% financing is often a prudent move. This pushes out your cost structure and allows you to keep more of your money to make use (investments, etc) where you can theoretically earn interest.

It also allows people to build their credit without a credit card.

But yes: people shouldn't be using it to buy things they can't afford.

A 0% financing bakes the seller's profit into the price paid and just makes it less rewarding to pay it off early.

Not always! I buy everything, including food shopping, on 0% credit cards and keep the money in savings accounts earning interest. I always have a matching amount in savings as the balance on credit.

What is the interest rate on your savings account?

When I graduated college, I furnished my apartment with furniture paid for with 0% financing on the Stør¹ credit card. Reading the fine print, if I didn't pay off the card in full by the end of six months, I would be charged some outrageous interest rate (over 20% IIRC—but this was 31 years ago so I could be wrong), backdated over the life of the loan. A lot of 0% financing works on similar bait-and-switch terms. If you look at the fine print on auto financing deals, it often requires a high down payment and short loan term and it's there more to get people into the dealership than anything else. Those few who are able to actually use it are considered an advertising cost.

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1. Stør was similar to IKEA but Danish and a bit more downmarkt

I have bought at least 3 vehicles with 0% interest loans, and no down payment.

The seller would not give me a lower price if I paid all or a portion in cash at the time of purchase. The only cost to me is the effect on my credit, but that is negligible unless if you are not excessively indebted.

By the do you mean you’re paying the “interest” cost of the loan as part of the sticker price? If so, that’s not always the case.

I used to offer 0% and absorb the cost of the financing (which cost me approx 2% of the profit) because it meant purchases from people who otherwise wouldn’t buy it.

> It also allows people to build their credit without a credit card.

I actually looked into this when I first saw these companies spring up, as I figured it couldn’t hurt to build up my credit some more, for free.

Unfortunately, unless I was mistaken, what I determined was that these companies don’t report your positive activities to the credit bureaus. The net result is that there’s nothing but downside from a credit perspective.

I typically budget a multiple of the item cost. “If I lost this item once or twice in the next week / month, could I afford buying it again to replace it”

You should only borrow for an investment. Houses sure. Cars, less so. You’d have to be very poor with a very strong need to have a car, and then I guess borrowing 3k to buy an old Toyota could make financial sense

> You’d have to be very poor with a very strong need to have a car

This describes many, many people.

Yeah, cars are an investment in the sense that people need them to make money (hold down a job).

Yes but saying it out loud forces people to think about what goes on outside of their own cozy, financial situations.

It is the opposite. If you have a high income or are otherwise wealthy, why would you pay cash for a car? Borrow the money for the car since it’s usually at or near 0% interest, and invest the cash you would have needed to pay for the car in an index fund. I cannot think of a time in the last 20 years where you would have not come out far ahead by investing the money for the car.

0% finance just means you’re paying a bigger upfront cost. Buying a new car is never worth it

You pay for cars in cash? Why?

My car loan is 2.5%..inflation is currently 8.x% (averaged 2-3% over the previous decade) and a typical annualized market return is 7-10%.

Dropping $30,000 of cash on a car is silly, don’t sell assets that generate a return to buy a car, which is a depreciating asset…

I understand not borrowing at 18-25% for consumer garbage, but financing at a low rate for a car is definitely a good idea.

Because you shouldn’t be dropping 30k on a car.. for 10k you can get a car that will easily last another 10 years

There are a lot of people for whom being homeless would be less disruptive to their life than being carless, especially in places outside the big cities where driving is mandatory. If you lose your car, you have to impose on somebody to drive you to work, which might cost them an hour out of their day every day, which is unsustainable so pretty quickly you lose your job, and then you have no income and no way of getting back on your feet. If you lose your apartment, you can probably find someone's basement or spare room to stay in for a while, chip in on rent, rebuild your finances, and look for a new place to stay.

It's the opposite situation to being in a big city, where you can get by without a car, and the concept of a "spare room" sounds luxurious if not wasteful.

I’m not arguing no against the use of a car, I’m saying you really shouldn’t borrow to buy one, unless you don’t even have 3k

as others ITT have said, I borrow every month on 0% interest for everyday purchases like groceries using my credit card, and its a net financial gain for me. You just shouldn't borrow more than you actually have unless its for an investment such as a house

If you're informed and disciplined about it, I absolutely think it's possible to use these services responsibly. I don't really see a problem if I have given myself a reasonable monthly allowance for discretionary spending and sometimes I decide I'd rather spend a higher amount over several months to get a toy now, rather than save up my allowance over several months to get the toy later for a lower total amount. As long as I've set my monthly allowance responsibly and I stick to it, I just see this as a preference for how I spend my play budget, no different than deciding to use my play budget on movie tickets vs. concerts vs. stereo equipment vs. anything else.

The bigger concern, of course, is to what extent these service providers deliberately influence people to spend irresponsibly, particularly if they make it difficult to understand at a glance the financial repercussions of the loan policies.

Why is this being treated like a new concept? Has the author never heard of layaway? It used to be quite common, and this is a strictly better version imo

Layaway is a different scheme: you pay down the price of a purchase in installments, and receive the item after the last payment. The layaway agreements that I'm aware of don't charge interest.

These schemes are VC-ified installment loans, which operate on the opposite model: you receive the purchase up front, and pay it down over time including interest payments.

They're arguably better on a strictly economic scale, since they give consumers the liquidity to make purchases that they'd like to make (and can actually afford, just not all at once.) They're arguably worse on a social scale, since installment loans are a form of cheap credit that people get addicted to, and are comparatively unregulated.

Most of the ones I've seen had no interest, so that's new to me. Definitely changes it but I think it's a little disingenuous for the author to not at least reference layaway

For what it's worth, layaway isn't common in the US anymore. It's entirely possible they didn't know about it, or don't consider it worth mentioning because the couldn't find an example of a company actually offering it anymore.

The article was written in 2017, and mentions an APR of 19% for a $200 purchase via Affirm. Looking online it looks like their current rates are around 10-13% unless you pick the shortest term loan[1].

[1]: https://www.affirm.com/how-it-works

It depends on risk. I lost my job and ended up tanking my credit score after several thousand in credit cards went to collection. Affirm offered me 29.99% APR for purchases.

I bought something off Amazon with Affirm, wasn't charged interest. I think they make money by partnering with companies like Amazon to promote more buyers and get a cut of sales from them instead of the consumer.

Out of curiosity, what were the repayment terms? I see on their website that they offer 0% APR on some of their shortest financings, so I wonder if you were bucketed into one of those.

(I would personally consider doing installments at 0%, so I'm curious as to whether you were given an advantageous plan based on a credit check or whether it was the timescale.)

I think you are correct about it being timescale-based.

I only used it once out of pure curiosity, so idk all of the intricate details, but they essentially offered a 4 equal monthly payments plan with 0% interest, as long as I pay it off on time. Tested it, worked as promised, all was good.

I bet if you go outside of their deadlines for payments/try to stretch it for longer, you will get hit with massive interest rates tho, but cannot confirm that. Mostly because I only use credit for things I can easily pay off in cash at any moment (except things like car/house obv), so I basically treat it like a debit card and pay it off very pedantically on time (because with 0% interest, it is essentially just extra leverage).

It was something like 6 payments at 0% interest so I took advantage of it. It was just offered as a payment option on the Amazon link. I'm seeing that now for condos I'm looking at renting next year too. While I can pay cash up front or just put on my credit card, I'd rather it sit and generate whatever small amount of interest and just use this to pay off my vacation over a few months with no interest.

I miss layaway, and TBH I wish we had layaway for big-ticket items like houses, cars, and POWER9 workstations.

I never really got the point of layaway. I give you money and you keep it interest-free until I pay for the item? Why not just put it into my own savings account and at least get interest on it?

> Why not just put it into my own savings account and at least get interest on it?

Because if it's immediately available in a savings account, the vast majority of people are much more likely to spend it on something else. The appeal of layaway is the willpower enforcement - worth the price of whatever pocket change you're likely to get in savings-account interest.

For me, the point of layaway is that I want something enough to commit to paying for it in advance a little at a time. A savings accounts is fungible; it isn't necessarily dedicated to anything and subject to me raiding it if I need to cover an unexpected expense.

Incidentally, where do you live that the interest on a mere savings account is worthwhile on a timescale of years rather than decades or centuries? Or am I taking "savings account" too literally when you mean things like certificates of deposit or money-market accounts?

> For me, the point of layaway is that I want something enough to commit to paying for it in advance a little at a time. A savings accounts is fungible; it isn't necessarily dedicated to anything and subject to me raiding it if I need to cover an unexpected expense.

You are making dhosek’s argument for them.

How so? By acknowledging the general utility of savings accounts while explaining why in some cases they aren't fit for purpose?

For what purpose are they not fit? They can do the same thing paying for layaway would, plus you get the protection of being able to use it for unexpected expenses.

If you didn't grow up working-poor and unbanked in the twentieth century you probably wouldn't understand.

I grew up lower middle class in the 80s. We got layaway to lock in a sale price and make sure the product is still available.

I always thought layaway was just used to lock in a sale price, so essentially, a customer is betting that the payment now plus the foregone interest/investment return in the payment will be less than the future sale price.

Because the item could be sold to someone else in the meantime.

It was a concept designed for the low- to middle-class in a very different era than what we have now. Especially in rural areas, banks were not often used by those who probably needed them the most, for a variety of reasons. Lots of workers were either paid in cash, or cashed their paycheck weekly at the local grocery/department/liquor store.

Even today, lots of people have the issue where if they _have_ money, they are compelled to spend it on frivolous things like entertainment and alcohol. Layaway was an easy and convenient tool that people could use to make sure they were putting at least some of their money toward things they really wanted.

How do credit card companies stay in business? If you just use a credit card like a debit card, it's just free money from the credit card companies. Or am I benefiting from others bad spending habits?

Affirm (and other installment type companies) offer a different benefit, I guess? No rewards, but you don't have to have all money on hand. I love this for my iPhone, but these installments could easily stack up.

They collect fees from merchants.

> Or am I benefiting from others bad spending habits?

Exactly this. I'm getting 3-5% cash back because some folks don't pay off their card every month. The rich get richer.

You're getting 3-5% cash back because they charge the merchants 3-5% extra on your purchases. That's it.

EDIT: point was, it's really nothing to do with whether other people are carrying balances or not.

And many merchants either have this priced into their product already, or charge a fee to process a card.

And if the merchants have it priced into their product, you're a fool to pay cash instead of getting your cut of the rebate.

Another thing to consider is that no payment method is free for the merchant. Even with cash, you need to pay Loomis, or you need to pay an employee to physically visit a bank.

and your individual spending choices have no bearing on whether the merchants will continue to charge that fee. So you might as well get the benefit of it

The companies that provide the cash back get way less than 3-5% of the gross purchase price. Merchant fees, at least for Visa, don't even approach 5%[0] -- it's more like 1.5 to 3%. And they're definitely not spending all that fee on rewards (and thus taking no profit).

0: https://paymentdepot.com/blog/average-credit-card-processing...

Credit card companies make money from merchants who pay them a fee and from interest on credit card debt. There are likely additional revenue streams but those are 2 prominent one.

> Credit card companies make money from merchants who pay them a fee and from interest on credit card debt.

Wrong on the second point. The issuing banks (Capital One, Chase, etc..) are the ones that collect the revenue from the interest/late fees on credit card debt.

The credit card companies (Visa, MC, etc..) only make money from the transaction and settlement phases.

Oh interesting, good to know.

> How do credit card companies stay in business?

Your purchase data is worth more than gold. Merchants also pay a fee on every credit card purchase.

I like you, pay off mine at the end of the month... It seems the percentage of people who do that is around 40%... which seems maybe high...

ALso don't forget, credit card companies charge at least 1.5% of a fee to the retailer, this is why some places (usually gas stations) will have a cash price and a card price...

But yeah... lots of the perks are paid for by the rest of people who aren't paying off the balance...

> If you just use a credit card like a debit card

Not sure how legitimate my source is but it looks like they raked in ~$75bn in 2020 from interest income alone. That makes me wonder if those of us that do use a CC as a debit card are a minority.

Source: https://www.fool.com/the-ascent/research/credit-card-company...

Very much a minority. The average credit card balance is over $5000 according to https://www.creditcards.com/statistics/credit-card-debt-stat... And the interest rates are ridiculously high so they can afford even a large number of people paying off their bills each month.

> How do credit card companies stay in business?

https://bam.kalzumeus.com/archive/how-credit-cards-make-mone... is worth a read.

Depends on what "credit card company" you are talking about.

Visa/Mastercard/AmEx and others don't care whether you are paying off your bill or not. The take a cut of every transaction done on their networks.

Banks that issue the cards do profit from interest, but that is somewhat balanced by some people just never paying. They also collect various kinds of fees, whether directly for the card or other parts of their business (e.g. they attract customers with good cash back cards then sell them on mortgages or auto loans).

Ultimately everyone is paying for credit cards simply from the price of goods they buy going up to account for the costs.

I am hearing from vendors that the card companies have been raising their rates recently too.

Two ways:

1. Interchange fees. You are probably paying 1 to 3 percent baked into the costs of what you are buying to pay for the privilege of using a credit card as method of payment.

2. If you don't pay off every month, you are paying pretty hefty interest on any of your balance that carries over from month to month.

This concept has been reincarnated as By Now Pay Later (BNPL) financing

https://www.nerdwallet.com/article/loans/personal-loans/buy-...

BNPL is the new darling of the finance world...at least 3 fintech are hard at work on this business model :-)

Was the new darling of the finance world. Affirm has fallen 80%, Zip/Sizzle has fallen 80%, Afterpay has fallen 60%, Klarna is reconsidering its IPO. This entire space has taken a well-deserved beating.

Don’t forget Upstart (UPST), high of 401.48 in Oct 21, closed at 38.13 today. 90% down from the peak.

No. If I have the money I buy it. If I don’t I save. And if by the time I have the money if I still want it then I get it otherwise I don’t buy it (I usually lose interest).

> Affirm wasn’t originally built for pants loans, or at least that’s not the founding folklore: Peter Thiel was tired of driving a carless Max Levchin around after they’d sold PayPal, the story goes, but Levchin couldn’t qualify for financing on his own.

Imagine selling PayPal *which you basically co-founded*, but not being able to purchase a car outright.

I’m baffled on this one, and want to know more about that entire situation.

Wiki says his stake was worth 34 million at the time of the acquisition:

https://en.wikipedia.org/wiki/Max_Levchin#PayPal

So I wonder what was going on there. Maybe some kind of vesting issue?

It's probably one of those made up founding stories. Max Levchin was worth $50M+ at that time. He could afford a car.

The only situation I can imagine was he was spending money faster than he brought it in, and at some point was missing payments which ruined his credit and he had to wait for more vesting to happen to get more cash flow

Yes, I would, at the right interest rate.

I, for one, am thrilled that access to 0% loans is becoming so easy, especially given the current inflationary environment. It allows me to keep more and more money in places earning real returns.

As long as you don't spend more than you can afford, profit abounds.

Financing everything seems like a good way to own nothing. Will people be happy with this over the long term?

I think there are a lot of reasons to dislike this kind of personal financing, but "owning nothing" isn't one of them. It isn't materially different from any other loan.

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