Consumers are coming to realize that credit cards are bad for their finances, said Renaud Laplanche, co-founder and CEO of Upgrade, Inc., a fintech marketplace for relatively low-cost installment loans.
The founder and former CEO of Lending Club is back in personal finance with a company that began in 2017 and has lent more than $7 billion to consumers. Its latest Series E Round raised $105 million, led by Koch Disruptive Technologies, plus participation from new and existing investors including BRV and Ventura Capital advised by Julius Baer, giving the firm a value of $3.325 billion. It is profitable, Laplanche said.
Upgrade offers installment loans with regular payments of principal and interest and, importantly, an end date when the loan will be paid off.
“Credit cards are a pretty bad consumer product,” Laplanche explained. “The average interest rate is about 17%, and they have a lot of fees on top of that. The worst feature is the monthly minimum payment which is very small, but if you only make the minimum it will take you 20 years to pay it off. Credit card companies are designed to keep customers in debt indefinitely, and that’s why there is a trillion in credit card debt.”
Upgrade is different, he added. It comes with an installment structure rather than the revolving, never ending credit card balance that people carry over every month. The company offers direct personal loans and an Upgrade Visa card which can be used like a credit card in a store or online. The firm also offers 2% on checking.
“The reason we can afford to do that and remain profitable is that we also have credit products (Upgrade Card and personal loans), and many of our checking customers also become credit customers over time. So we don’t need to make money from the rewards checking account,” explained Laplanche.
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With the Upgrade card, loans end up with a payoff date.
“At the end of each month the balance turns into an installment plan that customers pay down over 6 months or a few years — it comes with enforced discipline of paying down principal and interest each month, so it is easy to budget for. It comes with a sleep-well-at night factor of paying down your debt. You bought something expensive, but a year from now it will be completely paid off.”
After a few months of using Upgrade customers are improving their credit scores and reducing their debt, he added. Upgrade customers often use an installment loan to pay off credit card debt and start over, knowing they have access to credit that they can pay off quickly. Laplanche said the average Upgrade customer is 42 years old, earns about $100,000 a year and has a credit score of 700.
“I think we are seeing that the broader consumer population is coming to realize credit cards are bad for you and you should pay down your debt. It took a lot — a financial crisis, people losing their homes and the recent Covid crisis.”
Banks could have developed something similar to Upgrade but it wouldn’t have been as profitable as revolving credit, he added.
The shutdown of branch networks during Covid showed people they didn’t really need a bank branch — they would conduct their banking online. The rise of neo banks does present come competition for Upgrade, but probably more importantly it expands consumer knowledge of branchless banking, he said.
Upgrade uses artificial intelligence and machine learning to rate the credit worthiness of customers, Laplanche said and then prices its loans as efficiently as possible.
Magnify Money, a financial products comparison site, said Upgrade’s rates range from 5.94 % to 35.9% when you factor in origination fees of 2.90% to 8% that are deducted from the amount borrowed. Loans have no prepayment penalty and the firm offers free credit health monitoring.
“On average our APRs including fees are in the low teens,” said Laplanche. “Our customers say they save 4 to 5 percentage points compared to their traditional credit cards.”
“A loan received through Upgrade can be used for a major purchase, to consolidate debt, pay off or refinance credit card debt, or to finance a home improvement project,” Magnify Money said in its review.
Credit Karma members posted a range of ratings from five stars to one star, along with some complaints about customer service, although the overall rating is 4.4 stars.
Upgrade sells its prime and superprime loans and credit card lending to banks and credit unions while lower quality, higher yield loans appeal to asset manages who have more risk appetite and are looking for higher returns.
“We have no interest in building a big balance sheet,” Laplanche said. “As soon as we originate loans or our customers have credit card receivable, we sell them.”