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PayPal co-founder secures $100 million credit line for start-up Affirm

Financial technology start-up Affirm announced on Thursday that it had secured a $100 million credit line from Morgan Stanley.

Affirm offers loans for particular purposes as an alternative to credit cards. It aims to help millennials afford nicer things, Max Levchin, Affirm's CEO and PayPal co-founder, told CNBC's "Squawk Alley" on Thursday.

"We are helping them take an expensive item — that would hit the cash flow too hard —split it into several payments, pay it off, be done," Levchin said. "A lot of people prefer that to the complexity and unpredictability of carrying a credit card balance."

Here's how it works: Online retailers like 3-D printing company Makerbot and mattress start-up Casper accept Affirm directly. On top of that, users can create a "virtual card" and pay at other stores they same way they would pay with a Mastercard.

But unlike a credit card, each purchase has its own one-time credit line, rather than an open, revolving line of credit that's always available. Plus, the interest rate and time period are simple and set, not compounded over an unlimited period.

Max Levchin
Noah Berger | Bloomberg | Getty Images
Max Levchin

That can take away the risk of overspending that many younger consumers associate with credit cards, Levchin said. A study of conversational analysis and surveys from Facebook found this year that millennials, ages 21 to 34 in the U.S., are more likely to feel that credit cards worsen financial standing and are more likely to prefer paying with cash than other generations.

"It makes them smarter," Levchin said. "I think they understand that compounding interest is something that a regular human being cannot estimate in their head and they prefer simple interest loans. They certainly value services that have no late fees, no gotchas, no tricks. And I think that's generally a good direction."

Affirm doesn't have any special data sources compared to other financial institutions, Levchin said. But Affirm isn't seeing more defaults, he said, because they have a history financing certain types of goods and purchases (such as furniture, jewelry and professional development).

"People treat different purchases very differently," Levchin said. "Some things are seen as 'I don't feel I need to be paying for this thing, it wasn't all that important to me, it turns out.' Others are very, very good about paying for very specific things. We're quite good at detecting that behavior."

It come as more banks have ventured into the online lending business, including Goldman Sachs, which debuted its online lending platform Marcus on Thursday. But it also comes as both online lenders and traditional banks face scrutiny.

LendingClub, for instance, has been plagued by regulatory investigations amid reports of lending improprieties. And Wells Fargo's community banking division opened about 2 million accounts without customer authorization.

"Ever since 2008, every day a new story breaks out where a bank broke consumers' trust," said Levchin, who also serves as an advisory board member of the Consumer Financial Protection Bureau. "What's going on now is personal accountability, which I frankly welcome."