A fine line separates debt and savings (between the black hole of high-interest credit card payments and the slow progress of financial health), and that issue is taking on increasing importance as more consumers live paycheck to paycheck and use credit more liberally. The big question: What tools can be put in consumers’ hands to help them walk that fine line without comprising their financial health?
In a new PYMNTS interview with Karen Webster on Tuesday (June 18), LendingClub President Steve Allocca addressed that issue in depth, and how credit can be used as a tool for savings, not just spending. The peg for that discussion? LendingClub’s decision (also announced on Tuesday) to extend balance-transfer options to more borrowers. The new offering lets borrowers seamlessly pay off credit card balances that carry high interest rates as part of the personal loan process.
“It makes so much sense for everyone,” he told Webster. Not only that, but the new offering is a “really exciting opportunity for growth.” Among the main virtues of the offering, according to Allocca, the loans to help pay off those high-interest credit card debts do indeed go to those specific debts — easing anxieties among investors and other interested parties that consumers will use those fresh funds for other purposes.
“You motivate [consumers] to do the right thing,” he said. “You can get them on the path to financial stability, and [to] make responsible decisions.”
That’s not to imply that he takes a judgement attitude toward consumers stuck in the vicious cycle of high-interest credit card debt. As he told Webster, some 80 percent of U.S. consumers are living paycheck to paycheck.
Here are the program essentials.
Borrowers enter their account information, and the amount they’d like to pay down, when they apply for a balance-transfer loan. The company then makes sure that creditors receive direct payment, and that the money remaining from a customer’s loan is deposited into their bank accounts. Many members who opt for a balance-transfer loan save money, reduce their credit card interest rates and increase their credit scores.
The company said it piloted balance transfer with a subset of debt consolidation and credit card refinance borrowers for over a year, prior to making it more widely available for qualifying customers. It works with over 1,700 credit card, bank and loan companies via a partner network. Through balance transfer, members can add up to 12 creditors per loan. They are also “able to begin improving their financial health immediately — from the time of their application,” according to the company.
All this promotes long-term efforts toward better financial health, according to Allocca. “You are putting more savings into [consumers’] wallets,” he said. Not only that, but doing so — via such a balance-transfer offering — enables another move that could provide benefits in the long term.
Many consumers, especially those with multiple high-interest credit card debts, tend to have reduced wiggle room for those emergency or “shock” expenses. Giving them a tool to help pay down those debts can enable those consumers to build up a savings account, which could be used to cover those unexpected expenses. “It can become a virtuous cycle,” he said. “They can shift those emergency funds from credit to savings.”
In addition, paying off those high-interest credit card debts can lead to more access to lower-interest credit.
More broadly, at least in Allocca’s view, the credit card and consumer landscape is dominated by a focus on spending. That’s fine, as far as it goes, but without proper management of that spending, high interest rates can cut into the ability of consumers to spend as much as they may like with retailers — which, in turn, puts a wrench in the larger economic cycle. The new offering from LendingClub is also designed to give consumers a better view into their own spending and the costs of their consumer loans. Better financial management tools are also necessary.
“I don’t think it will change overnight,” he said. However, “as we embrace tech, we have an obligation to provide more financial education and more financial literacy to make it easier for customers to [understand] the financial decision[s] they make.”