Consumers are realizing 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 company that started in 2017 and has lent 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 billion. It’s profitable, says Laplanche.
Upgrade offers installment loans with regular principal and interest payments and, most importantly, an end date when the loan will be repaid.
“Credit cards are a very bad consumer product,” Laplanche explained. “The average interest rate is around 17%, and they have a lot of extra fees. The worst feature is the minimum monthly payment which is very low, 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’s a trillion in credit card debt.
Upgrading is different, he added. It comes with an installment structure rather than the never-ending, revolving credit card balance that people carry over each month. The company offers direct personal loans and a Visa Upgrade card that can be used like a credit card in a 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 checking customers also become credit customers over time. time. So we don’t need to pull money from the rewards checking account,” Laplanche explained.
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 the added discipline of paying back principal and interest each month, it’s so easy to budget for. It comes with a factor of getting a good night’s sleep to pay off your debt. You bought something expensive, but in a year it will be fully paid off.
After a few months of using Upgrade, customers improve their credit rating and reduce 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 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’re seeing the general consumer population realize that credit cards are bad for you and you should pay off 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 closure of branch networks during Covid showed people that they didn’t really need a bank branch – they would be banking online. With the rise of neo-banks comes competition to upgrade, but probably more importantly, it expands consumer knowledge about branchless banking, he said.
Upgrade uses artificial intelligence and machine learning to assess customer creditworthiness, Laplanche said, and then assesses 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 take into account origination fees of 2.90% to 8% which are deducted from the amount borrowed. The loans have no prepayment penalty and the company offers free credit health monitoring.
“On average, our APRs, including fees, are in the low years,” Laplanche said. “Our customers say they save 4-5 percentage points compared to their traditional credit cards.”
“A loan received through Upgrade can be used for a large 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 posted a range of ratings from five stars to one star, as well as complaints about customer service, though the overall rating was 4.4 stars.
Upgrade sells its prime and superprime loans and credit card loans to banks and credit unions, while lower-grade, higher-yielding loans attract asset managers who have more risk appetite and seek higher returns.
“We have no interest in building a big balance sheet,” Laplanche said. “As soon as we issue loans or our customers have credit card receivables, we sell them.”