I’m going to purchase a used $45k car and decided to try UPST auto loan services.
While the process itself was pretty easy and straightforward the actual loan offer was just bad.
They proposed a whooping 18%+ 3Y auto loan. I guess their ML/AI is just missing something major. I have a clear financials and financed multiple cars before. My FICO 8 is around 780. I had never missed a payment.
For reference, currently I have a promotional 1.99% 3Y auto loan. In a past I never had an auto loan APR above 6% even for 5Y loans.
I do understand that direct auto loans is probably not their significant businesses but it’s still a disappointment.
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We keep coming back to this as a group. Upstart is not in the business of lowering the cost of loans to everyone. They’re in the business of finding a set of people that theoretically will pay back their loans, despite being in a group that the regular processes exclude or charge very high rates. And then they offer those people loans at better rates than the other avenues available to them.
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I am not sure that trying to explain away any and all criticism is ever a useful approach.
Why would Upstart self-limit its TAM to a sub-set of borrowers?
If UPST can charge less qualified borrowers lower rates, why would it issue such an offer to a more qualified borrower? It is not a redistributive social service.
Chances are there is a simple tech explanation related to the novelty of the product.
Where borrowers who qualify for the best rates anyway can benefit from UPST is in cutting the paperwork/hassle involved in dealing with credit unions. I would pay a fee to UPST just to cut on time and hassle and ensure that my information is safe and that the CU is not emailing me PDFs with my SSN on them.
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Why would Upstart self-limit its TAM to a sub-set of borrowers?
If UPST can charge less qualified borrowers lower rates, why would it issue such an offer to a more qualified borrower? It is not a redistributive social service.
I don’t know why the rate is that high (18%), but like the original poster I am surprised by any auto loan offer for anything more than around 2-3%.
Where would be the margin for UPST in this case? It doesn’t take any fancy machine learning to see that someone with a 750+ FICO score is going to be able to pay back the loan.
They’ve also mentioned the “risk” that the loans are paid off early. If I was offered a loan for 10% I would just buy the car with cash. The UPST models may be optimized for those with less access to capital, and someone with a lot of cash on hand may just have a very high risk of early payoff at any rate higher than necessary for a decent margin (say 8%) so they are forced to offer an even higher rate.
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I had a similar experience looking into an Upstart personal loan but not as high a rate. I also have a 750+ credit score. The rate I received from Upstart was 8.5%, the rate I received from a company called LightStream (owned by Suntrust bank who merged with BB&T) was 5%.
My realization is that the system is not broken for someone wanting to get a loan with a FICO score above 750. Upstart is trying to extend lending for people that don’t have access. I agree with IRdoc however, that in their current state they appear to be limiting their TAM by not offering competitive loans to all borrowers.
I have also used Sofi to refinance my student loans the first time and MOHELA Education Loan Finance to refinance my student loans a second time. These lenders were very easy to use online.
In addition I used Rocket mortgage to refinance my mortgage.
I think there is plenty of competition in the lending market for borrowers with a FICO score above 750. I think this will be something to watch with Upstart over the long term
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Upstart charges fees and an interest percentage. The lender does the same. These are added together to make the offer to the borrower. At low interest rates (good borrower credit) this total is more than some lenders would offer if doing it alone. Thus the loan offer will be competitive only or mostly to those with low FICO scores, and thus even higher loan costs.
As has been posted multiple times.
Upstart is not interested in lending to people with good credit and high FICO scores that market is already served well. By bankers adhering to the old rule of primarily lending only to those who do not need the money. At least for individuals , occasionally they seem to be willing to lend to Russia, Mexico, and real estate barons. Who really do need the money.
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$UPST’s AI has been instructed to identify PROFITALE loans, not necessarily to better-serve particular populations or to make loans that make sense to those with high FICO scores.
I think it’s easy to lose sight of that because $UPST’s messaging, quite naturally, does not focus on that; instead their messaging emphasizes their ability to lend to those with lower FICO scores at less-exploitive rates vs. the competition.
But as has been dissected here, they are able to make these loans with a surprisingly low level of risk. If they were ONLY about helping people, they’d charge the same interest rate to two people with different FICO scores that their AI scored as equally likely to pay back the loan. But I bet they don’t to that; instead, I bet they do charge a higher interest rate to the person with the lower FICO score. If that’s true, then contrary to their messaging, they are still exploiting people based on their FICO score…BUT. They are exploiting them less than the competition is.
Now let’s add another factor: their AI isn’t ONLY assessing the likelihood that a Borrower will pay back a loan. It is also assessing the likelihood that the borrower will pay it off early, which is contrary to $UPST’s interests! They want the ROI on the ENTIRE balance of the loan, not just part of it. If the Borrower pays the loan off too soon, the loan doesn’t generate as much $$ in interest. Take the extreme case of someone borrowing $20,000, making one payment, then paying it all off: that is NOT a profitable loan!
So perhaps $UPST assessed RMMM’s loan application and decided that it was too likely to get paid off early, and that therefore they’d have to charge a high interest rate, because it’s likely that only a few payments would be made, and thus they’d barely make any $$ on interest?
Not attached to these ideas; just trying to brainstorm a bit.
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