While the personal loan has been around for centuries and the credit card has been around for decades they have never been combined into one product before. Until now. On stage at LendIt Fintech USA 2018 today Renaud Laplanche, the CEO and co-founder of Upgrade, will announce this groundbreaking new product.
I chatted with Renaud last week to get the latest news on Upgrade and to talk about this new product. He immediately wanted to start talking about financial health. As an industry we should be doing more to help the overall health of consumers and not just sell them a personal loan.
At Upgrade they are trying to do just that. They have released a broad suite of free tools to help consumers understand their credit health. They have credit monitoring tools like many other vendors but what Upgrade has done that is new is create a credit score simulator. This tool will show you a couple of dozen “what if” scenarios personalized to your own situation that are very practical and useful. There are also many articles and short videos to help people understand credit more. Having both credit monitoring and loans under one roof also provides benefits to users with a tighter integration between the two products.
There is more to discuss here but let’s get back to the focus of this article: Upgrade’s new Personal Credit Line.
How This Personal Credit Line Will Work
One of the biggest drawbacks of credit cards is that they can trap you in a cycle of debt. Where paying the minimum monthly balance could mean many years and huge interest payments before paying off the debt in full. All the while you are at the mercy of the variable interest rates that most cards carry.
The personal credit line will help solve some of these challenges. It is easiest to understand by running through an example.
A consumer applies for a personal credit line of, say, $20,000 to do some home repairs. Upgrade does an initial soft pull to check how much they qualify for, and then a hard pull on their credit once they are approved for that amount and have opened the line. Now, at this time, no money has changed hands, they are just approved for this $20,000 amount and have a credit line ready to use.
The first month they need to spend $5,000. They request a $5,000 draw on this credit line and at the same time they select a payment plan, choosing a loan term with an interest rate which will be fixed for the duration of this loan. Terms vary from 12 to 60 months. There is no origination fee. The customer receives the $5,000 and will start paying back this fully amortizing loan the next month.
Now, in the second month they may need $10,000. Again they will select a payment plan, choosing a loan term with a fixed interest rate. And so another loan is created and the payments for this loan will be added to the previous loan.
In the third month they may choose to utilize another $5,000 and so a third loan will be created. Each time Upgrade does a new soft pull on the consumer’s credit to help price the loan.
So, the customer will have three fixed rate loans that could have different durations and different interest rates. Renaud pointed out that if the consumer selects the same term length for each loan, unless their financial situation has changed, they will likely pay the same interest rate for each loan. In any case, the rate applicable to each advance will never change after that advance has been made.
The big question I had was about the economics. The personal loan product, particularly when it comes to marketplace lending, relies on an origination fee as a major source of revenue. With this product there are no fees at all. Renaud explained that they would make money on the spread by marking up these loans to investors. So, they are not going to lose revenue by cannibalizing their existing loan product.
The Personal Credit Line Paired With an Actual Credit Card
This is where it really gets interesting I think. There is no reason why this fixed rate loan concept could not be applied to a credit card product. Renaud has thought about that and intends to launch a card to access the line in the near future. He quipped that “this will be the first credit card that is good for your financial health”.
While he wouldn’t give a timetable for when this will happen he did say that Upgrade will launch a physical credit card as well as a virtual tokenized card soon, where swiping the card or using mobile payment will draw on the personal credit line.
My Take
The first thing I thought when Renaud explained this to me was that it is strange no one has thought of this before. It is a simple concept combining two very mature products.
My second thought was that given this is a new product and a new way of looking at unsecured credit that there will be some education needed with consumers so they can understand this product.
The reality is that many consumers use credit cards in ways that are bad for their financial health. Credit cards are great to use for convenience but they are a lousy way to borrow money. With more than $1 trillion in credit card debt in this country something needs to be done.
I have to admit I am a little skeptical that consumers would flock to a new product like this. Renaud said people understand the concept as just “credit on demand” and it really is quite easy to explain. But it will require some changes in how people view credit and that change may take time.
I applaud Upgrade for introducing this new concept in credit. For this to get serious traction, though, I think we need to see many others copy the concept. Unfortunately, people don’t always want what is good for them and this product is most certainly better than the traditional credit card. So, if we start to see other marketplace lenders as well as banks copy this concept we could really move the needle when it comes to the financial health of consumers.
