Consumers are increasingly realizing that credit cards are bad for their finances, said Renaud Laplanche, co-founder and CEO of Upgrade, Inc., a fintech marketplace for relatively cheap installment loans.
Lending Club’s founder and former CEO is back in personal finance with a company founded in 2017 that has loaned more than $ 7 billion to consumers. Its most recent Series E round raised $ 105 million, led by Koch Disruptive Technologies, as well as new and existing investors including BRV and Ventura Capital advised by Julius Baer, valued at 3.325 billion US dollar lends. It’s profitable, said Laplanche.
Upgrade offers installment loans with regular principal and interest payments and, most importantly, an end date on which the loan is repaid.
“Credit cards are a pretty bad consumer product,” explained Laplanche. “The average interest rate is around 17%, and there are a lot of fees on top of that. Worst of all is the minimum monthly payment, which is very small, but if you pay 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 credit card debt. ”
Upgrade is different, he added. It comes with a rate structure rather than the spinning, never-ending credit card balance that people transfer every month. The company offers direct personal loans and an upgrade Visa card that can be used like a credit card in a store or online. The company also offers 2% on checks.
“The reason we can afford this and stay profitable is that we also have credit products (upgrade cards and personal loans) and many of our check customers also become credit customers over time. So we don’t have to make any money with the premium checking account, ”explained Laplanche.
With the upgrade card, credits are given a payout date.
“At the end of each month, the balance becomes an installment plan that customers pay off over 6 months or a few years – it comes with the enforced discipline of paying off principal and interest every month so it’s easy to budget. It comes with a good night’s sleep factor to pay off your debts. You bought something expensive, but in a year it will be completely paid off. “
After a few months of using Upgrade, customers improve their creditworthiness and reduce their debt, he added. Upgrade customers often use an installment loan to settle credit card debt and start over, knowing they have access to credit that they can quickly pay off. According to Laplanche, the average upgrade customer is 42 years old, makes about $ 100,000 a year, and has a credit score of 700.
“I think we are seeing the wider consumer population realizing that credit cards are bad for you and that you should pay off your debts. It took a lot – a financial crisis, people who lost 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 closure of branch networks during Covid showed people that they really didn’t need a bank branch – they would do their banking online. While the rise of neobanks is a competition to upgrade, probably more importantly, it expands consumers’ knowledge of branchless banking, he said.
Upgrade uses artificial intelligence and machine learning to assess customers’ creditworthiness, Laplanche said, and then rate its loans as efficiently as possible.
Magnify Money, a financial products comparison site, said upgrade rates are between 5.94% and 35.9% when you factor in the 2.90% to 8% issue fees that are deducted from the amount borrowed. Loans have no prepayment penalties and the company offers free credit monitoring.
“On average, our APR, including fees, are in the low end,” said Laplanche. “Our customers say that they save 4 to 5 percentage points compared to their conventional credit cards.”
“An upgraded loan can be used to make a major purchase to consolidate debt, pay off or refinance credit card debt, or to fund a home improvement project,” Magnify Money said in its review.
Credit Karma members have given a range of ratings from five-star to one-star, along with some complaints about customer service, even though the overall rating is 4.4 stars.
Upgrade sells its prime and superprime loans, as well as credit card loans, to banks and credit unions, while low-quality, higher-yielding loans are attractive to asset managers who are more risk-taking and looking for higher returns.
“We have no interest in building a big balance sheet,” said Laplanche. “As soon as we extend loans or our customers have credit card receivables, we sell them.”