Affirm, a buy now, pay later company, has secured a $4 billion loan deal with private credit firm Sixth Street.

A joint venture worth billions of dollars is being formed by combining two popular areas in finance, fintech and private credit.

Sixth Street, a private-credit firm, is investing $4 billion in loans over three years, making it the largest-ever capital commitment for the company.

Affirm has secured capital from Sixth Street to underwrite short-term installment loans between 4- to 6-month timeframes. The capital will roll back into the pot to make more loans, with the potential to extend over $20 billion in loans over three years. The deal includes a ramp, and the loan sale will not begin until 2025, according to a source familiar with the terms.

In recent years, the growth of private credit has led alternative-asset managers to consider investing in non-bank fintech companies for more efficient financing options that can adapt to user demand.

Unlike banks, which primarily use deposits to fund loans, Affirm and its peers employ a range of funding models, including warehouse facilities, asset-backed securitizations, and forward flow agreements. For example, Affirm recently signed a deal with Sixth Street to purchase loans originated by Affirm for consumers as they buy items online through various platforms, including Amazon and Apple. Similarly, PayPal announced a similar deal this summer with KKR for loans originated in Europe.

While traditional banks may not directly provide financing, they still play a role in the supply chain by indirectly financing loans through private-credit funds and using their own balance sheets.

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

Affirm offers credit to consumers at APRs ranging from 0 to 36%, depending on the purchase, merchant, and likelihood of repayment. If a consumer is late or misses a payment, they do not owe any additional amount, resulting in no extra yield for investors if the loan is not repaid on time. As of September, Affirm's delinquency rate was 2.8% of active balances.