June 13, 2020 Update: Upgrade offers outrageously high interest rate personal loans in a record-low interest rate environment. At least Upgrade has credit-building tools.
I much prefer Credible instead for personal loans because Credible is a marketplace where personal loan lenders compete for your business. The competition helps ensure you are getting a competitive rate.
Upgrade is a personal loans company founded by Renaud Laplanche, the former CEO and founder of online lending pioneer LendingClub. LendingClub has had a rough time since going public in 2015, with their company down ~80% from its highs.
What's also important to know is that there was some controversy at LendingClub when Renaud Laplanche was there. In 2016, the LendingClub board ousted Renaud because they discovered he improperly changed some of the company's lending products to make it look more healthy than reality. With a higher loan volume, he could lure in more investors to his company.
The Securities and Exchange Commission charged Mr. Laplanche with fraud, and they ultimately settled with a $200,000 fine and being barred from the securities industry for three years. This is very important information to know, because Mr. Laplanche cooked the lending books when LendingClub was private.
Therefore, one cannot be too sure whether the growth in Upgrade is 100% real or also a little bit cooked. Mr. Laplanche didn't significantly alter LendingClub's books. It was a small change that in the grand scheme of things, was insignificant. However, the worry is that if he was willing to lie about something small, what larger lies are there in the future?
We all make mistakes. I get it. I have confidence Mr. Laplanche has learned his lesson. He's a very rich man, and when you get to his level of wealth, your reputation means more than anything.
Investors seem to agree that Mr. Laplanche can be trusted because Upgrade raised a massive $60 million Series A round of funding on March 17, 2017 from 10 investors. $60 million has to be one of the largest Series A rounds recorded.
Not All Personal Loans Are Created Equal
Upgrade is a personal loans lender at the end of the day. Personal loans are much more expensive than auto loans and mortgage loans because there is generally no collateral behind them. Think about the type of people who take out personal loans and why?
Maybe they have medical bills. Maybe they ran up their credit card debt because of irresponsible spending. Maybe they want to borrow for a three week European vacation they can't really afford.
You only take out a high interest personal loan if you've been in an accident, have poor credit, or want to spend money on something you really shouldn't. In other words, Upgrade wants to get in the business of lending money to unfortunate people who really should be saving more instead of spending more.
I have a fundamental problem with this type of business. We should be encouraging people to be more fiscally responsible instead of less. I've always pushed people to save more, invest more, and build more streams of income because they should only depend on themselves in retirement and nobody else.
The reason why so many investors piled into Upgrade is because lending money to people who are in trouble or who have bad credit is highly lucrative. Leplanche says that Upgrade is one of few online lenders that considers loan applicants’ free cash flow. The idea is to keep people from borrowing more than they can afford by having a pretty high bar in terms of how much free cash you really have at the end of the month.
Related reading: Credit Cards vs Personal Loans: Which Is Better?
Upgrade Personal Loans Review
Here’s a closer look at features offered by Upgrade:
Pre-qualify with soft credit pull: Upgrade lets you check your rate and offers with a soft credit pull, which does not impact your credit score. If you accept the offer, a hard pull is triggered. See: Check your credit score for free.
High debt-to-income ratio allowed: Upgrade requires borrowers to have a maximum DTI ratio, which is monthly debt payments divided by income, of 60%.
Line of credit: Upgrade offers a personal line of credit up to $50,000. Why someone with poor credit would need this much money is a mystery. Advances on the line have fixed annual rates of 6.37% to 35.39% and repayment terms that vary from 12 to 60 months. That's right, up to a 35.39% interest rate!
Credit health tools: Upgrade offers tools to help consumers understand their credit, including credit monitoring, alerts, a credit simulator and access to free educational content.
Hardship programs: Consumers who experience a sudden hardship, like a job loss, may qualify for a temporary reduction of their monthly payment or a permanent loan modification that extends the length of the loan.
Fees: Outrageous. I can't get over the fact that Upgrade is willing to lend at a 35.97% interest rate. Not even the great Warren Buffett has returned greater than 15% a year compounded annually. Upgrade wants to charge double that!
Not only are they advertising they will charge you 35.97% interest rate, they are going to charge another 1% – 6% UP FRONT in origination fee to further kick you when you are down.
Upgrade uses an example of a borrower with “good credit” and says a $25,000 loan with a repayment term of 36 months at 18% would carry monthly payments of $904. 18% is about 6X greater than the current risk free rate of return at 3.2%. 6X is absurd!
An 18% interest rate is a ripoff. You might as well sign up for a credit card charging a 0% introductory rate for the first year, and no more than a 14.99% APR. There are plenty of credit cards like that around.
Beware Of Borrowing From Upgrade
Upgrade targets borrowers with credit scores between 620 and 685. If you are one of these guys, my main suggestion to you is to STOP BORROWING and start saving.
Do everything possible to cut expenses to a bare minimum. Get a second or third job. Drive for Uber or Lyft, do TaskRabbit jobs, or find some online freelance work on Upwork.
The last thing you should be doing is borrowing at high interest rates from a company like Upgrade. The only thing you can consider is consolidating your debts with Upgrade if the Upgrade interest rate is lower than your other interest rates. That is it.
Upgrade and its investors are salivating to take borrowers in and charge them an arm and a leg. Don't fall for their offers. Instead, educate yourself as much about personal finance by reading my archives. Life is much better with less debt. Financial freedom is priceless.
The one actionable tip I can give you is to keep track of your finances. Either write everything down on an Excel spreadsheet or track everything online with a free financial tool like Personal Capital. It'll help you keep track of your cash flow, your investments, and provide a holistic view of your new worth once you link your accounts. What you can measure you can optimize.
Related: Pay Down Debt Or Invest? Implement FS-DAIR
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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