Money Rehab with Nicole Lapin - "Good Debt" is Real — Here's How To Use It (Encore)

Episode Date: January 21, 2024

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." Originally aired 05.23.23

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. 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 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 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, 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 L joined Lending Club 2010 company was very, very small, then still, you know, 3040 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 because 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, 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%. 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. 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 bucks. 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 the one of the most eye opening thing for people

living in their own bubble is what percentage of the actual American population is de facto living paycheck to paycheck. You know, 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, you know, medical emergency, divorce, all of these things that, you know, that's just life. And when that happens, they temporarily go upside down, right? And if they don't have a big enough savings cushion, then they're going to go into debt, typically credit card debt. then they're going to go into debt, typically credit card debt.

So 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. So, you know, we give people two,

three, four or 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 don't we have the rewards go to pay down your loan faster? And oh, by the way, as we were creating savings offer, 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 it 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 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 going to say, yeah, well, I mean, 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 $5,000 set aside for the venue. You could write a check to the venue for $5,000 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 then000 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 six percent see what i did there so on the five thousand dollar personal loan you paid an extra 150 dollars in interest but on the five thousand dollar i bond you earned an extra 450 dollars so you would be up overall 300 bucks 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 which 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. Thank you.