Affirm strikes a $4 billion loan deal with private equity firm Sixth Street

Two trendy areas of finance – fintech and private credit – are coming together in a new multi-billion dollar joint venture.

Consolidating tenures is receiving its largest capital commitment ever with a new partnership from private equity firm Sixth Street, which is investing in $4 billion in loans over three years.

Sixth Street commits upfront capital for Affirm to underwrite short-term installment loans, between four and six month timeframes. Once it is paid back, the capital goes back into the pot to make more loans, totaling more than $20 billion that could extend over the three years of the partnership. The deal includes a ramp, and loan sales won't begin until 2025, according to a person familiar with the terms.

As private credit has increased in recent years, other asset managers are increasingly looking to non-bank, fintech companies to invest capital. The fintech companies are choosing what they see as more efficient sources of funding that may increase or decrease according to the demand of the end users.

Unlike banks, which rely more on deposits to make loans, Affirm and many of its peers opt for a variety of funding models, including warehouse facilities, security-backed assets and so-called flow-through agreements, such as the one he signed with Sixth Street. This means that Sixth Street intends to purchase loans originated by Affirm for consumers when they buy products online through platforms between Amazon and Apple. PayPal name a similar deal this summer with KKR for loans originating in Europe.

But traditional banks are not completely out of the financing supply chain. They indirectly fund these loans, along with private credit funds, off the banks' own balance sheets.

The entire ecosystem is funding a higher capacity for more short-term installment loans and buy now, pay later products in anticipation of demand growth. As of September 30, Affirm's funding capacity was $16.8 billion, resulting in 130% growth over the past three years. Total product volume growth for the first nine months of the year was 34%, higher than last year but below 2022 levels.

Affirm provides credit to consumers at APRs ranging from 0% to 36%, depending on the purchase, the buyer and the likelihood that the consumer will repay the loan. If a consumer is late or misses a payment, they have no additional amount, which means there is no additional return for investors if the loan is not repaid on time. The delinquency rate over 30 days as a percentage of active balances was 2.8 percent as of September.