I rarely post, but had to share my and a friend’s experience using the upstart program. Clearly the market thinks they are doing something right as their revenue is increasing at a huge rate. However, have any of you gone to their website and attempted to get a loan?
My friend and I both did. We are both retired and investment income is our primary source of income and it exceeds $ 200,000 a year each. Both of us have mid 7 figure net worth. My friend has a PHD in statistics and I have a Bachelor degree in comparison. (Inputs requested by Upstart) We both own two homes, one in Washington state and one in Arizona. His are debt free and he has not had a loan in many years, both of my homes are mortgaged as well as a small apartment building I own. Both of us are are married and our spouses are retired. My wife and I just purchased the Arizona home and are in the process of remodeling.
His quoted interest rate for a $ 20,000 loan was over 20% per year. Mine was over 12.5% per year. Considering a credit union was willing to loan me $ 150,000 at 3.59% on a home equity line of credit I wonder where Upstart is getting their customers?
Any thoughts on how large the market is for high interest loans? I mean 20% a year seems outrageous to me, you can borrow on a credit card for a better rate? If so, who would take a loan from Upstart at their quoted interest rate?
You are comparing unsecured loan rates with a secured loan (home equity). Personal loans are mainly taken by customers who either do not qualify for a credit card or have used up their limit.
I’ve said this previously, applicants who go direct through upstart.com are most likely getting offers from either Finwise or Cross River Bank. Both of them charge every customer an 8% origination fee.
This is what some folks have messaged me as their experience as I have never gone through upstart.com directly. However, I have applied via their other bank partner. Associated Bank appears not to charge an origination fee, at least in my case, and UPST gave me the lowest APR of all competitors.
Spitballing here, but I think it could be the level of assets you quoted that threw the red flag and therefore the high rate. Given the financial picture you gave them, why would either of you need an unsecured personal loan? We know you’re just testing their system; but they may be worried that you’re trying to game the system somehow. I’m not an underwriter, but if I saw that request without a narrative about what was going on, I would be suspicious of the activity and might hedge that with an outrageous rate in the hopes that the person went elsewhere.
As I understand it, Upstart’s target customers for personal lending are people who have traditionally had difficulty securing a loan when based on the common metrics–FICO score, primarily. Undoubtedly they have or will expand their customer base beyond that, but Upstart formed to solve a problem: People who have a complex history (that can be captured in a wide variety of typically-ignored data points) that indicates they will pay back what they borrow, but whose traditional metrics lead banks to think otherwise.
So people who before could not get a loan at all, now get loans and are happy even with a high rate. And people who before got loans at exorbitant rates get rates that are lower than offered elsewhere. Banks also end up making fewer mistakes about who is and is not a risk, which saves them money, while allowing them to make more loans. Everyone wins.
Upstart’s AI lets them sniff out real risk through more reliable metrics–not only risk of default, but also risk of fraud, money laundering, etc. (which also saves banks money). You may well have been flagged as a risk in one of the latter categories, because someone of your means asking for an unsecured $20k loan makes no sense.
I’d like to add to JabbokRiver42 post that Upstart evaluates not only risks of fraud and money laundering, but also the “risk” of prepayment. Which could be high in the Winlockdon’s cases. From S-1:
"Borrowers may prepay a loan at any time without penalty, which could reduce our servicing fees and deter our bank partners and investors from investing in loans facilitated by our platform.
A borrower may decide to prepay all or a portion of the remaining principal amount on a loan at any time without penalty.
If the entire or a significant portion of the remaining unpaid principal amount of a loan is prepaid, we would not receive a servicing fee, or we would receive a significantly lower servicing fee associated with such prepaid loan. Prepayments may occur for a variety of reasons, including if interest rates decrease after a loan is made.
If a significant volume of prepayments occurs, the amount of our servicing fees would decline, which could harm our business and results of operations.
Our AI models are designed to predict prepayment rates. However, if a significant volume of prepayments occur that our AI models do not accurately predict, returns targeted by our bank partners and investors in our loan funding programs would be adversely affected and our ability to attract new bank partners and investors in our loan funding programs would be negatively affected."
Even if Upstart does not make as much money from “well off” people who could pay off early, doesn’t it still make any sense to keep all business. Wouldn’t every loan add to the contribution margin?
If someone is coming from CreditKarma as that is about 50% of their referrals, does it mean that all of these clients are getting hit with origination fee due to 2 banks they are using ?
Also, it looks to me that Upstart is upping their marketing efforts and I see Google ads that lead to their website, so in that case those will be loans with 8% origination fee?
I guess the real question is how many loans as a % are without origination fee?
Also I’m not sure if someone had a chance to review the 1 star reviews on CredirKarma’s Upstart review.
UPST takes up to 7% in fees etc on a loan. After paying these fees ,investors buying these loans from UPST can not make money lending to higher net worth individuals at low interest rates. But if a loan has a rate of 17% and Upstart takes 5% to 7% of that ,you are still getting a nice return. As long as the default rate is sufficiently ow.
So the high rate is what Upstart wants ,not what you might want. They don’t expect you to take it. But who knows, maybe a few do. The stiff fees Upstart charges are worth it to investors buying these high interest rate loans as long as borrowers pay off reliably compared to loans made using FICO alone. And of course the stiff fees are nice for Upstart’s bottom line.
There are plenty of customers out there who fit into Upstart’s desirable high interest rate loan category. A point -despite the high rates Upstarts customer ratings are exceptionally high. Most personal loan (or car loan) customers will come back again and again. Likely many repeat loan customers are in erratic or seasonal business, good pay periods followed by not so good ones.
I am very dubious whether neural networks can reliably forecast repayment of very long term loans like mortgages. But since they are hiring in that category they must think it may be possible to improve over present criteria. Likely that guy with the recent DDS in dentistry is more likely to be a better mortgage bet than the guy/gal with a recent degree in film or French literature…
Does anyone have any information on how Upstart is handling the current rent moratorium? If you are not allowed to hold not being current on your rent against your credit score? What will happen once the rent moratorium is over and the evictions start in mass? Thanks for any information from people in the know.
I wrote to Upstart IR asking them to explain the high rates quoted to prime borrowers-
The response from Upstart:
At this time, we are primarily focused on borrowers below super prime, whom we believe are being under served by current credit models and typically offered interest rates which do not correspond to their true default risk or are unable to access credit at all.
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Seems like prime borrowers are a dont care for the company at this moment. I assume that this is deliberate on their part, they do not feel the need to serve the prime and near prime market as yet and that they feel their current target of below prime provides adequate TAM for their growth objectives.
I was able to find some statistics from the Consumer Financial Protection Bureau. The numbers are dated 2018, which was the most recent that I could locate. This data shows the % of auto loans originated to each level of borrower in the first column, with the % of the adult population in the second column.
% Auto Loans % of Population
Deep subprime 7.2% 42%
Subprime 7.0% 12%
Near-prime 11.0% 6%
Prime 21.8% 6%
Super-prime 53.0% 13%
Thin/Stale File N/A 11%
Credit Invisible N/A 11%
Super-prime borrowing represents over half of all auto loans originated in 2018, but only 13% of the total US population. Prime and near-prime borrowers make up nearly the same amount of the population, but only 32.8% of loans originated.
There seems to be a lot of inefficiency in this market for Upstart to exploit.
/First post - I hope it was informative and adds to the conversation. Constructive criticism is very welcome.