Money Rehab with Nicole Lapin - "Good Debt" Is Real. Here's How To Use It.

Episode Date: May 23, 2023

Today, Nicole gives you a way to fight back against a system that’s typically set-up against you: lending. Along the way, she shares insights from a recent conversation with Scott Sanborn, the CEO of LendingClub, who shares Nicole's passion for making lending more equitable. Nicole and Scott unpack who gets hurt in traditional systems of lending, how to use credit as a tool and "good debt."

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Today, I'm going to be giving you a way to fight back against a system that's typically set up against you, lending. Recently, I talked to Scott Sanborn, the CEO of Lending Club, who is also passionate

about making the system more equitable. Later in this episode, I'm going to be giving you a winning strategy to use when managing your money. But first, here's a little background from Scott. So the traditional lending systems obviously didn't work for everyone. But first, let's talk about the folks that it did work well for, like traditional lending systems did work well for, I suppose, people that had money. Even, you know, work well, you had the ability to go get a loan. And in the case where we started, if you look at personal loans, those went away when credit cards came, right? So basically, what happened is banks as a whole said, if you need access to cash, use this instead. And there's a reason that banks hold credit card assets on their balance sheet.

And it's a reason why some of the biggest banks in the country also happen to have that as a core profit engine is that is a very profitable vehicle for a bank and for a consumer. It is a very convenient way to pay for stuff, but if you're actually using it as a loan, it's a pretty crappy loan. It's a high interest rate and it is a floating rate. So, you know, again, I would say, does it work? Yes. But does it work well for the actual purpose of borrowing money? The answer is no, because it's loaded with all of this, you know, all of these perks and benefits and bonuses that are, you know, gosh, they allow you to get discounts at Macy's or, you know, whatever, gear from the Giants, right? They have all these fan-based programs that have a lot of expenses. I mean, the actual core function of

getting access to low cost credit is not actually great. It was not great. Yeah. And let's double click on that for a second. The other side who it didn't work for. We've had a financial advocate, friend of the network, actor Hill Harper on the shows. We've talked a lot about predatory lending and other systems that hurt people in marginalized communities. He said it really well in this, it kind of went viral on our socials, that it's expensive to be poor, right? It's so true. It's definitely reinforced by these more archaic systems of lending. So do you agree with that when it comes to being expensive to be poor? I'd go even broader based. I'd say if you can go back to those days,

when I joined Lending Club 2010, the company was very, very small then, still 30, 40 people. I did my comparison shopping. Can I get a personal loan from Wells Fargo at that time? The answer was, well, yes, if you're a Wells Fargo customer, you can, but you have to have a Wells Fargo bank account. So right away, did it work? I was good credit quality. So it wasn't that I was a bad credit risk. It was just, I have to be a bank customer. So it only worked for the bank customer. That's one. And then two, what was the actual process, literally print out this form that's on our website and mail it or email it or bring it into a branch, wait three or four days, and we will tell you whether or not you're approved. And I was a Wells Fargo customer. And if you are approved, your rate is going to be

15 or 17%. I mean, so, okay, I guess it worked. I happen to be a customer and yeah, but like compare that with Lending Club, which was get your answer instantly, get your money in your account the next day. Don't have to bank with us in order to get a loan from us. Oh, and by the way, your rate is based on your risk. It can be as low as, you know, low single digits interest rate or as high as, you know, low single digits interest rate or as high as, you know, call it a credit card interest rate if you're if you're higher risk. So it worked, but it could work better. So let's take a second to really unpack this. The point that Scott is making is that banks make a lot of money when you accumulate credit card debt let's break down the numbers here right now the average apr or annual percentage rate on a credit card is 24.12 percent that's how much you'll

accumulate in interest on credit card debt compare this to the average apy or annual percentage yield the average interest earned in a savings account in the United States, that rate has been 0.4%. Yes, that is less than 1%. So what does that mean? This means that while your bank is making over 24% from you, you're only making 0.4% from them. Here's how it adds up. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these

have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself.

Find a co-host at Airbnb.com slash host. And now for some more money rehab. If you have $10,000 in credit card debt with your bank, you're going to owe over $2,400 in interest. But if you had $10,000 in a savings account with the same bank, you're probably only going to earn $40. The difference in what the bank makes on you and spends on you is called the split. And the split hurts more Americans than you might think. Here's Scott again. I think one of the most eye-opening things for people living in their own bubble is what percentage of the actual American population is de facto living paycheck to paycheck.

I think there's this idea that, oh, only people who aren't responsible have credit card debt. No, 50% of people with credit cards have credit card debt. 50%, one out of every two. So it's not this like, you know, splinter population of irresponsible people. It's everybody. And it's because cost of living has far, you know, forget the recent inflationary environment, right? Healthcare, education, housing has all far outstripped income.

Lots and lots of people are living paycheck to paycheck. And all it takes for those people is temporary job loss or disruption to income, medical emergency, divorce, all of these things that that's just life. And when that happens, they temporarily go upside down. And if they don't have a big enough savings cushion, then they're going to go into debt, typically credit card debt. So what, you know, what we're really building for people is one, the ability to access credit that is lower cost than the credit card debt. So we're, and it's fixed rate, and it's lower cost. So we're about, we're typically about 400 basis points below what our customers are paying on their cards. So if your card is at 16%, we're at 12.

So we'll give them a fixed timeline to be out of debt. So credit cards, as you know, it's the minimum monthly payment. And if you make the minimum monthly payment, then you have credit, you're paying your credit card debt off over 20 plus years. payment, then you're paying your credit card debt off over 20 plus years. So we give people two, three, four, five year options to pay the credit card debt down. Now that we've clicked in the bank, what we're working on with people is really a, hey, let us help you stay on top of it. Now, okay, now you're on a path to paying off your credit card debt. What we're working on is, well, can we help you monitor your debt now? Because what you'd like to think is I paid off my credit card debt and then I sailed

off into the sunset. And you do. And then three years later, life happens again. A tree falls on your car, you hurt yourself doing something. And so what we've seen is people come back. Half of our business is people who paid off their credit card debt and came back five years later. So we're trying to build something that helps people monitor that debt on an ongoing basis, stay on top of it, and then also creates opportunities for savings by integrating

banking and saying like, hey, if you bank with us, can we give you a better rate on your personal loan? Instead of giving you cashback rewards, why we give you a better rate on your personal loan? Instead of giving you cashback rewards, why don't we have the rewards go to pay on your loan faster? And oh, by the way, as we were creating savings offers, if you were paying, let me make it easy, if you're paying 200 bucks a month for your credit card before and now with Lending Club, you only pay 170. Why don't you keep paying 200 and we'll take the 30 and we'll put into a high yield savings account for you. And at the end of your loan, you know, you'll have over $1,000 in savings that you didn't have before. And if you keep that habit up and, you know, we pay, we're like generally top three, top five highest paying savings rates. So we're, you know, right

now we're paying a four and a quarter percent for people. We're trying to create a really integrated experience that understands life happens. Let's help you manage it. Let's give you easy access to low cost credit when you need it. But when times are good for you, let's help you build up a buffer so that the next time life happens, rather than going into debt, you're able to tap the savings that we've helped you create. No, Scott, it's really important. It's awesome that you say that. It drives me crazy. And I argue with the likes of, let's just say, Dave Ramsey, who tells people to have a zero credit score because you should buy everything in cash. I'm like, cool, cool. And then

life happens. There's no riding off into the sunset. You know, you know what happens. It happens to all of us. And you need debt or you need to take out a loan. So that's just more of a realistic approach. And I like it. I appreciate it. So thank you. I was gonna say, yeah, well, I mean, we're a big thing for us is you remember that getting credit used to be a good thing. Like you should get some credit. You should give yourself some credit. Like credit can be used strategically and customers using it as a as a crotch versus as a tool and knowing when you're using it. And, you know, both of those things are going to happen. But knowing when you're using it, for what reason is really, really important. So let's break this tool down and no, not just the tool of credit and debt, but a bigger picture

tool, a strategy to help make sure you have more money coming in than is going out. So here's an example, and it's a little mathy, but stay with me. Say you're getting married and have $5,000 set aside for the venue. I'm going to try to contain myself and not rant on wedding prices but i have told a money rehabber before to call off a wedding she couldn't afford it is crazy out there but anyway say you have five thousand dollars set aside for the venue you could write a check to the venue for five grand and be done with it or you could be strategic and find investments that will out earn debt so let's imagine a scenario that looks like this. Instead of giving your $5,000 to the venue, you could have invested it in I-bonds when I told you to when they were earning about 9%. And then to pay the venue, you took out a personal loan for $5,000

at 3%. So yes, you took out a personal loan and paid 3% extra to do it. But at the same time, you're earning 9% in interest on an investment, which means that overall you're up 6%. See what I did there? So on the $5,000 personal loan, you paid an extra $150 in interest. But on the $5,000 I bond, you earned an extra $450. So you would be up overall $300. And because you used a personal loan to pay the venue, you also got the wedding backdrop of your dreams. Now, I'll just take a moment to say this is a pretty advanced move. It requires the time to compare different loans and investment vehicles and also requires a lot of attention to detail to make sure you're earning more than the debt you're accumulating.

So if you're feeling overwhelmed with your finances right now, it's probably not time to try this arbitrage move. Plus, in this interest rate environment, taking on debt is more expensive. So if your credit score isn't where you want it to be, it might be too difficult to use your investments to outpace your loans.

So if it's not the time to try this at home, don't beat yourself up, because acting on this information right now is not the takeaway from this episode. The most important lesson of all of this is that you should just shift your thinking. Maybe stop thinking that debt is always a dirty word and start looking for opportunities to leverage debt, credit, and your investments. For today's tip, you can take straight to the bank. Right now, some U.S. treasuries are earning more than 5%. If you have debt, like a mortgage or a car loan that's earning less than 5%, head on over to treasurydraft.gov, or an easier way to do this is download the public app to see what U.S. treasury investments can make your balance sheet net positive. Money Rehab is a production of Money News Network. I'm your host,

Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.