UPST's outperformance in personal loans

Investment Analysis Clubs Saul’s Investing Discussions
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I decided to perform deeper due diligence on Upstart’s securitized loan performance versus other competitors. And the results are absolutely SHOCKING.

I gathered the Cumulative Net Loss (CNL) and Cumulative Net Default Analyses, all pulled from Kroll Bond Rating Agency (KBRA) comprehensive surveillance reports which were inclusive of data from similar time periods for 2020 (all through the depths of COVID, into June/July 2020).

They are for Upstart and 6 peers’ personal loan trusts:
Upstart (UPST), Lending Club (CLUB), Upgrade (UPGR/UMPT), Prosper (PMIT), Avant (AVNT), Marlette/Best Egg (MFT), Sofi (SCLP).

They were uploaded to the following image link: https://i.imgur.com/4sIm1Lb.png (sources down at bottom)

If you take a look at Upstart’s CNL, every single trust up to 2020 has at least 30% to 54% DECREASE in CNL from KBRA’s base case assumptions at time of closing!

Meanwhile, the exact OPPOSITE is seen across the board. Everybody else you can see their trusts are, at minimum, underperforming (though Prosper’s trusts are mostly performing close to expected) their CNL or CND.

Some other highlights:
Lending Club, “as of the January 9, 2020 statistical cutoff date, the collateral pool has the following characteristics: the weighted average FICO score is 713”.
In comparison, Upstart’s weighted average FICO for the past year (see below) was 674. And yet despite the far lower FICO scores, we can see Uupstart’s Cumulative Net Loss rates for 2020 issuances have greatly outperformed those of Lending Club!

The most recent issuance FICO weighted averages (2019-2020) for comparison:
Sofi FICO weighted average: 753
Marlette (Best Egg) FICO weighted average: 724
Prosper FICO weighted average: 715
Lending Club FICO Weighted average: 713
Upgrade FICO weighted average: 698
Upstart FICO weighted average: 674
Avant FICO weighted average: 650

Other commentary:

“Loans originated under the Program are unsecured consumer installment loans that are three, five, or seven years in term, have a loan size from $1,000 to $50,000, are fixed rate, amortizing monthly and have no prepayment penalties. The loan APR ranges between 6.5% and 35.99% including an origination fee of up to 8%.
For Program originations from January 1, 2020 to March 31, 2021, the most common borrower is approximately 28 years old and approximately 42% and 43% of the borrowers’ report that they use the loan to pay off a credit card and for debt consolidation, respectively.
As of March 31, 2021 and based on original principal balance, Upstart’s borrowers have an average salary and FICO score of approximately $86,546 and 674, respectively and approximately 66% of the Upstart Program loans consist of borrowers who have at least a college degree. Upstart Program loans have a weighted average current interest rate of approximately 18.9%.”

https://www.kbra.com/documents/report/49258/upstart-pass-thr… (it will require login, but it is free to create an account)

Upstart appears to be weighting heavily to the millenial generation (age 28) with good incomes (average 86K salary).
They are achieving Net Promoter Scores of 81+ (source: https://www.upstart.com/for-banks/), so hopefully they are impressing upon these young borrowers of their delightful loan experience.
Perhaps, this will lead to repeat borrowing in the future across other Upstart product lines (auto and future ?mortgages, helocs, etc), especially as millenials look to purchase homes/start families/buy cars/ etc in the coming years.
(Of course, borrowers may not realize their good experience is from Upstart, if they went through bank branded/powered by Upstart application rather than the direct website)

Sources (To obtain the reports, it will require you to login to KBRA, but it is free to create an account):

https://www.kbra.com/documents/report/40126/abs-upstart-secu…

https://www.kbra.com/documents/report/35406/abs-marlette-fun…

https://www.kbra.com/documents/report/39255/abs-avant-loans-…

https://www.kbra.com/documents/report/40242/abs-upgrade-rece…

https://www.kbra.com/documents/report/39878/abs-prosper-mark…

https://www.kbra.com/documents/report/45376/sofi-consumer-lo…

https://www.kbra.com/documents/report/40074/abs-consumer-loa…

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Great work jonwayne235!!

Quick thought : It says there ,“weighted average current interest rate of of approximately 18.9%”. If these borrowers of Upstart’s personal loans are using the loan to pay off credit card bills or other debt consolidation, is the debt on the credit cards higher than 18.9%? From my understanding, isn’t credit card debt usually around 15-18%?? So, what would the benefit be of borrowing money at such a high rate??

I am probably looking at this wrong, but that was th first thought that came into my head when I saw 18.9%. Further, as they move into auto loans, which is secured by the actual car, then obviously the average rate of 18.9% is going to be much, much lower.

Dave

long UPST

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Dave,

Thank you. Hope the deep dive helps us all confirm the reality of UPST being an early AI/ML disrupter of the lending industry. I plan to keep tabs on KBRA issuances/reports on UPST and its competitors moving forward.

Regarding the interest rate. I actually am not sure if that 18.9% is the APR? or just the rate for the borrower excluding any origination fee? In any case, credit card debt rates for these below-prime consumers are often above 20%, which is the majority of UPST’s underwritten customers. So they should be saving money. The average card rate is skewed by the above-prime consumers.

According to CFPB report (latest is 2019, conducted every 2 years) here are the effective credit card rates:

Deep subprime: 21.50%
Subprime: 20.40%
Near-prime: 19.10%
Prime: 16.80%
Super-prime: 12.50%
Average: 15.60%

https://files.consumerfinance.gov/f/documents/cfpb_consumer-…

Also, according to LendingTree:

Americans carried a balance (did not pay in full before next month) on 53% of all active credit card accounts in the fourth quarter of 2020.

For cards that are accruing interest, the average in Q1 2021 was 15.91%.

For new credit card offers, the average today is 19.47%.

https://www.lendingtree.com/credit-cards/credit-card-debt-st…

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Do people really pay 18% interest? Maybe I am naive, but I wouldn’t think the pool of this sort of borrower is very large. Hope their expansion is swift….

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I agree Jillie101. Borrowing at 18.9% is not real a win for the customer. Obviously, like Jonwayne235 pointed out, 18.9% is better than over 20% on credit card debt for sub-prime borrowers, but I wouldn’t call that a real win for the customer. If they could borrow at 10-12% on a personal loan vs 20% on credit card debt, then that would be a big win. For the banks, this does seem like it would be a big win, because they are getting more loans from people who would not be able to get personal loans in the past based just on FICO scores.

BUT, I think the main take-away from this is that from Jonwayne235’s original post, UPST is doing a better job than competitors in the personal loan category. And, I remember from listening to an interview last week from UPST’s founders, the reason why they started in personal loans was because, in their minds, that would be the hardest loan category to figure out. So, there thinking went, if they can succeed in the hardest loan category first, then they can most likely succeed in car loans and HELOC’s and other types of loans where the interest rates are much less than 18.9%.

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dackerman21,

Keep in mind:

In August 2019, the CFPB released the results of a study that compared Upstart’s underwriting with a traditional underwriting model. It found that Upstart’s use of alternative data and machine learning led to the following:

Overall, 27% more applicants were approved for a loan.
Borrowers received an average of 16% lower APRs on their loans.
Those with FICO® Scores in the 620 to 660 range were about twice as likely to be approved.
Young applicants (under 25 years old) were almost 32% more likely to get a loan.
Applicants who make less than $50,000 a year were 13% more likely to get a loan.

So, at 16% lower APR then that means Upsstart’s 18.9% average rate could mean borrowers on average were already facing 22.5% rates otherwise.

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Dackerman, A post saying just “Great work!” fills up the board with a junk post without adding any knowledge for anyone. If you want to say that to someone, click the “E-Mail this Reply to the Author” box and unclick “Post this Reply to the Boards.”

Your post will, of course, be deleted.

Saul

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