Consumers are starting 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 inexpensive installment loans.
The founder and former CEO of Lending Club is back in personal finance with a business that started in 2017 and has loaned more than $ 7 billion to consumers. Its latest Series E round raised $ 105 million, led by Koch Disruptive Technologies, along with participation from new and existing investors including BRV and Ventura Capital advised by Julius Baer, giving the company a value of 3.325. billions of dollars. It’s profitable, says Laplanche.
Upgrade offers installment loans with regular payments of principal and interest and, most importantly, an end date when the loan will be repaid.
“Credit cards are a very bad consumer product,” explained Laplanche. “The average interest rate is around 17%, and they have a lot of fees on top of that. The worst feature is the minimum monthly 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 are a trillion in credit card debt.
The upgrade is different, he added. It comes with an installment structure rather than the endless revolving credit card balance that people carry over each month. The company offers direct personal loans and an Upgrade Visa card that can be used as a credit card in-store or online. The company also offers 2% on verification.
“The reason we can afford to do this and stay profitable is that we also have credit products (upgrade card and personal loans), and many of our check customers also become credit customers over time. So we don’t need to earn money with the rewards checking account, ”explained Laplanche.
With the Upgrade card, loans end with a repayment date.
“At the end of each month, the balance turns into an installment plan that customers pay off over 6 months or a few years. It comes with a good night’s sleep factor to pay off your debt. You bought something expensive, but in a year it will be fully refunded.
After a few months of using Upgrade, customers improve their credit scores and reduce their debt, he added. Upgrade customers often use an installment loan to pay off their credit card debt and start over, knowing they have access to credit they can pay off quickly. Laplanche said the average Upgrade customer is 42 years old, earns around $ 100,000 a year, and has a credit score of 700.
“I think we’re finding that the general consumer population is realizing that credit cards are bad for you and that you should pay off your debt. 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 shutdown of branch networks during Covid showed people that they didn’t really need a bank branch – they would do their banking online. The rise of neo-banks presents competition for the upgrade, but probably more importantly, it expands consumers’ knowledge about branchless banking, he said.
The upgrade uses artificial intelligence and machine learning to assess customers’ creditworthiness, Laplanche said, and then price its loans as efficiently as possible.
Magnify Money, a financial product comparison site, said upgrade rates range from 5.94% to 35.9% when you factor in the 2.90% to 8% origination fee which is deducted from the amount borrowed. The loans do not come with any prepayment penalties and the company offers free credit health monitoring.
“On average, our APRs, including fees, are in the lower teenage bracket,” said Laplanche. “Our customers report saving 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, to pay off or refinance credit card debt, or to fund a home improvement project,” Magnify Money said in its review.
Credit Karma members have posted a range of ratings from five to one star, along with a few customer service complaints, though the overall rating is 4.4 stars.
Upgrade sells its prime and premium loans and credit card loans to banks and credit unions, while lower quality, higher yielding loans attract asset managers who have more risk appetites and seek higher returns.
“We have no interest in building a big balance sheet,” Laplanche said. “As soon as we create loans or our customers have a credit card debt, we sell them. “