The Urban Institute analyzed 7 million people. The goal of the study was to understand the debt profile of America. The results are sobering: 77 million Americans have an unpaid debt of some kind. This represents 35% of adults with some existing credit file. The average credit card debt is $5,315.

The problem is not simply the debt alone but rather all that comes with it. The inability to pay debts like credit card balances reveals a bigger problem. It’s the inability to handle cash emergencies. In the event of a medical crisis or a repair to a crucial home appliance, those who carry this kind of debt will not be able to afford a solution. In difficult times like these, many turn to their credit cards.

What happens when the credit card is no longer a choice? This is the predicament of millions of Americans, and it’s getting worse.

The solution to Debt Spiral

Debt creates more debt. Insolvency generates credit card balances. Soon, the cardholder is unable to pay. The credit score diminishes. In time borrowing ability erodes, and the downward spiral continues. The commonality of this problem has given rise to several online solutions.

LendUp is designed for people in this position. LendUp helps people meet immediate cash needs with short-term and long-term loans. Let’s start by looking at their short-term loan offering.

Short-term loan offers range from $100-$250 in value with a 7-30 days repayment duration. While the amount is not high, the financing speed will satisfy many borrowers. The fastest approvals can fund the recipient’s account in as little as 15 minutes.

It sounds like too little to make a difference. However, the statistics say otherwise. In a survey, Forbes learned that more than half (63%) of Americans could not cover an emergency cost of as little as $500.

Accessing something as small as $100-$250 can mean the difference between stopping the downward spiral and making it worse. Installment, and there is no credit minimum requirement. Those with a poor credit history can still secure funds. There are long-term loans available for those who need more than a few hundred dollars.

The LendUp long-term loans reach as high as $1,000 with a greater repayment period of 12 months. The payments are made in regular installments. This allows the borrower to ease and flexibility smaller payments over a protracted time horizon. The application can be completed at any time, and the review and approval process is fast.

How Does This Help Your Credit & Future Borrowing?

Some have labeled LendUp as nothing more than “a payday loan.” While it’s true that the offers on LendUp do resemble traditional payday loans, there are some key differences.

First, the total fees, interest, and APRs are made abundantly clear from the beginning. The user will immediately see the required total repayment and interest rate before providing any personal information.

Second, the process is fast and without the need to visit a brick and mortar office as one would with a conventional payday loan.

Third, LendUp offers the opportunity for long-term success with their “LendUp ladder” program. This is a reward system that incentives borrowers to repay responsibly. As the required payments are made on time, the borrower ascends the proverbial “ladder.” By exhibiting this responsible behavior, borrowers earn points. As the point add up, the user is permitted more favorable terms on future borrowing with LendUp.

These improved terms, earned over time, are things like:

• Ability to borrower more.
• Lower APR.
• Easier repayment structure.

Fourth, LendUp offers optional reporting to credit bureaus. For the responsible borrower, this can have a strong impact on the future. This benefit can be enjoyed with a loan as low as $700 paid in installments. This means that a user can take out $700, and as long as the payments are timely and of the required amount, they can reap the benefits of an improved score. The points necessary to reach this benefit are also awarded to those who:

• Engage in the free online LendUp courses.
• Refer a friend.
• Post a positive LendUp review.

This system allows LendUp to offer more attractive interest rates to users. This further differentiates LendUp from the nefarious practice of payday lending. While this is undoubtedly a marketing ploy, it offers some genuinely powerful ways to rebuild damaged credit. The poor credit flexibility offered by LendUp is a second chance for borrowers that would otherwise have no place to go.

Is There Real Value in The LendUp Model?

The small loan amounts characteristic of LendUp may serve an unseen purpose. Those with poor credit history may not control themselves with larger sums. A common practice for those in need and suffering from poor credit is to open a new credit card. There are many options tailored to those with poor credit. However, the result is that an irresponsible borrower has access to a high limit and an elevated APR. This environment is dangerous for someone trying to get back on their feet.

Transparency is another helpful feature of the site. Bad credit is often the result of a borrower who doesn’t understand their liability. APRs and terms can quickly become confusing, eventually ensnaring the borrower in a web. LendUp interface operates to empower the borrower to be fully aware of all costs upfront and without ambiguity. However, this doesn’t mean that the process is without fees.

Before starting with LendUp, consider some of the penalties associated with poor repayment behavior. A $15 fee will be assessed on any account, yielding an “insufficient funds” notice upon the automatic repayment execution. Additionally, a $15 late fee will be charged when the required payment is made beyond 15 days from the due date. Finally, there is a small administrative fee of $50. This applies to all loans. If this is greater than 5% of the loan value, then LendUp will use the lesser of the two values.

How Do LendUp Rates Compare?

The benefits of LendUp’s fast execution and friendly approach to credit come at a cost. Any borrower engaging in a LendUp loan will need to equip themselves with an understanding of interest rates and how those offered by LendUp compare. The absolute minimum rate a LendUp user can achieve is 29%. This is available only to those who have already displayed strong repayment history with previous LendUp loans. No user will be able to walk in the door at that rate.

Though you may not achieve a loan through more conventional means, it is still wise to compare against other averages. For example, compare your rate to the national average auto loan if you’re using a LendUp loan for a car repair or even to help finance a car purchase. Today the national average for an auto loan rests around 4%. At LendUp, you’ll need to pay a lot more. LendUp may be your only option, but it’s worth noting just how much it will cost to go for the fast solution.

Consider the option of using a credit card before resorting to LendUp if possible. Why? The national average credit card interest rate hovers around an APR of 15%. Again, this is vastly lower than the most aggressive rates on LendUp. While the site has some admirable features, the company is for those who have few places to go.

Look at The Dollars, Not The Percentages

An APR of 408% will give anyone a nightmare. The number is almost unfathomable in the context of borrowing. This is the APR a LendUp borrower can expect to pay on a loan of $250.00 over the course of 14 days. Before falling to the floor at a 408% APR site, consider the dollar cost. This equates to a total interest payment of $39.20, a far more pleasant number. The rate looks terrifying because of the way LendUp is required to present the information. The example LendUp provides is this:

“If you borrow $100 for 30 days from LendUp, you pay a total of $17, or 17%, in fees. To phrase that in terms of APR (Annual Percentage Rate), which we are legally required to do, you multiply 17% by 12 months: 17% * 12 = 204%. But, no LendUp borrower could ever owe anything more than the original $17 because the loan is only for 30 days, and we don’t allow rollovers”.

At the end of the day, the dollars will be coming out of your wallet, not percentages. The easy calculators on the site will quickly provide you with a clear dollar value you can expect to repay on whatever loan you’re considering. Again, transparency is a virtue, and LendUp abides.

How You’ll Be Evaluated

LendUp relies on a constellation of data when evaluating a potential borrower. In contrast with a traditional loan, they use other sources beyond conventional credit reporting bureaus. This can mean things like public records and non-traditional credit bureaus. LendUp only uses sources that are FCRA compliant. This is the Fair Credit Reporting Act. This is an exhaustive list of regulations stipulating what can and cannot be included in a consumer’s credit report. By using only FCRA compliant sources, LendUp is committing to rules preventing the use of any information that may contain things like civil suits, civil judgments, accounts placed for collection, and medical information.

If you don’t receive approval, LendUp will provide the information sources from which they based this decision. The purpose is to allow the applicant to correct any false information that may have lead to an unfair denial.

These aspects should be important to a LendUp customer as their system is designed for a long-term improvement in credit scores. As discussed above, the differentiating factor is the ability to have your progress reported to major credit-reporting bureaus for the gradual improvement of your score. It isn’t easy to quantify just how impact successfully repaying a LendUp loan will be on your score. However, there is some data available to estimate the effectiveness.

The Financial Industry Regulatory Authority (FINRA) provides a useful analysis of credit scores and how they work. Scores range from 300 to 850. While there are excellent, free resources for obtaining your score, it’s important to understand how the final figure is calculated. FINRA provides the following breakdown:

• Payment History 35%.
• Amount Owed 30%.
• Length of Credit History 15%.
• Type of Credit 10%.
• New Credit Inquiries 10%.

The opportunity to repay a manageable loan balance via LendUp offers the potential to boost your score’s payment history aspect. However, the LendUp loans, on the whole, do not have a particularly long term.

Therefore, the effect — at least initially — will be limited. This also applies to the amount owed. LendUp loans, both short-term and long-term, are relatively low balances. Again, it may take several incremental borrowing periods to build up amounts.

The “Type of Credit” metric will likely have a much lesser influence when engaging in a LendUp loan. As the FINRA site explains, “You do not have to have each type of account. Instead, this factor considers the various types of credit you have and whether you use that credit appropriately.

For example, using a credit card to purchase a boat could hurt your score.” Given that credit card is not in play, there is no reason to expect your activity with LendUp to be reflected here.

New credit inquiries are a common concern for those checking their own score. It is a common misconception that requesting your free annual credit score will adversely impact your score. This is not true. These are deemed “soft hits” and do not impact your score in any way. The same is true for the style of inquiry LendUp performs. This is a draw for those who already have credit issues and don’t want to invite more problems.

The Wall Street Journal has written about this new “big data” approach to using algorithms and sophisticated modeling to predict their borrowers’ behavior better. The author explained that companies like LendUp, “use statistical modeling techniques to analyze large data sets, with the idea that weighing thousands of new variables will let them better predict creditworthiness.

New variables include borrowers’ rent records and data from small credit bureaus, which can include information on prior payday loans, transactions with pawn shops, and collections.” The ability of LendUp to leverage such voluminous data comes from the fact that Google owns them. These companies exist to use their massive data pools to generate income.

How You Rank Today

You may be surprised to see how your credit profile matches the US populous average. The average consumer has 15 different credit obligations. This is the very phenomenon that has provided a marketplace for LendUp. Of these 15, the average consumer has 9 credit cards and 6 that are installment loans.

Payment history is no more impressive. While most consumers do pay on-time, 39% of credit holders have been 60 or more days late on a credit balance. However, many of these balances are relatively low at less than $1,000. Just 18% of the US has a balance of over $10,000.

If a customer uses LendUp, chances are their available credit has been fully extended. LendUp is an option suited for those who no longer have availability on their credit card or have no credit card at all. The average combined credit cardholder has $27,500 of available credit across all their cards. Consider these figures as you review your own financial picture. If you find yourself at these averages or above them, then it’s time to reconsider your personal finances and future borrowing seriously.

Maximizing The LendUp Effect

As with any problem-solving endeavor, the best way to get results is with a multifaceted approach. This means using the credit reporting benefits of LendUp in conjunction with other smart practices for a better score.

To accelerate your credit standing process, start by getting organized. This means taking advantage of the government’s free annual credit report. You can access yours here. This is important because it provides the opportunity to spot any errors or missing information that might be unfairly hurting your score. You will be surprised to see how much information is out of date.

Use automated reminders to keep your credit card payments regular. If you’re confident that the funds will be available, you can take this one step further and use automatic debiting. In this case, there will be no need to remember payments that might otherwise be ignored. Regular, on-time payments will have a strong impact on your credit score. This practice also gradually lowers the amount of debt you owe, which is a major factor in determining your score.

There is no need to work towards a “no credit card” goal. In fact, having credit cards and an available limit unused is a good thing for your score. Credit card activity provides a basis from which reporting bureaus can generate a score. Therefore, you need some history to show that you can be a responsible borrower. The idea is to have credit, use credit, and regularly repay the credit.

Making a Plan that Saves You Money

A strong credit score is not the ultimate goal. The true final goal is to save more. When you have a superior score, you can save on interest rates. The cost of having a poor score can be life long. These costs are not insignificant. Consumers who don’t control their finances experience costs that only worsen the problem.

A 2009 publication from the Center For Responsible Lending illustrates this truth with hard numbers. The authors of the study determined that more than 50 million Americans overdrew on their accounts at least once in the course of a year.

This generates fees for the consumer that act like slow leaks from your account. The banks are rewarded for this consumer behavior, as evidenced by the $24 billion in revenue sourced directly from overdraft fees in 2008 alone. It’s no surprise that income from overdraft fees increased by 35% in just the two years spanning 2006 to 2008.

Putting The Pieces Together

LendUp can be a good option for those with an immediate cash need and no remaining resources. If the consumer is committed and able to make regular, on-time payments, LendUp offers some benefits via their “LendUp ladder.” However, like any solution to a long-term problem, consumers should expect the remedy to take time.

Using a combination of LendUp and good credit practices like those explained above will yield the consumer’s strongest benefit. Be sure to do the math before engaging in any loan, LendUp, or otherwise. As seen above, the APRs are among the highest in the market, but if you’re able to meet the dollar equivalent of these fees and are in great, short-term need, it might be an option for you. Be mindful of predatory lenders that fail to disclose all fees and penalties.

Finally, explore competitors. There are a few other new ventures designed to compete with LendUp. These include Avant, ZestFinance, and Think Finance Inc. Each has specific rules that differentiate them from each other.

A person suffering from poor credit is standing at a split in the road.

In one direction is the commitment to a long-term repair plan.

The other is a continuation of a downward spiral.

Choose your path.