Upstart peer to peer  was founded by three ex-Google employees.  That being the case, it is no surprise that the company’s model is changing the face of financing.  What is surprising, however, is that the COVID-19 pandemic and the following recession actually served to prove what they do really does work. 

How can a global pandemic solidify a lender that is still working to prove their way is the best way? 

Changing the Face of Financing

Financing is extended to borrowers based on their perceived risk.  That is the way of the world, and not only will it not change, it doesn’t need to.  What may change, is how that risk is determined.  Historically risk for individuals is based almost solely on FICO.  The funny thing is, most lenders do not really understand everything that goes into calculating a FICO score.  It combines financial information and credit score, that’s all they see.  Upstart peer to peer and their innovative AI risk model is helping lenders breaking away from this format and aiding them in making better lending decisions. 

Think about it.  We all know a business owner that doesn’t have a great FICO, but is totally capable and willing to make payments consistently and on-time. These borrowers are great for lenders, but many of them are missed due to the old model.

Upstart Peer to Peer: What is It?

Upstart peer to peer is a lending company that questions how well financial information and FICO alone actually predict the risk associated with a particular borrower.  They have developed a way to use a combination of artificial intelligence and machine learning to gather alternative data.  They then use this data to make credit decisions.

Alternative data includes things like mobile phone bills, rent, deposits, withdrawals, and even other information less directly tied to finances.  The company’s software learns and improves on its own. The really cool thing is, they don’t keep this software to themselves, but they also provide it to traditional lenders through a service called “Powered by Upstart.” 

Upstart Peer to Peer: Oversite 

Since this idea is so new, Upstart has worked with regulators from its inception in 2012 to make sure they stay within the law. 

In fact, they were the first company to receive a “no action” letter from the Consumer Financial Protection Bureau, or CFPB.  It basically says that the CFPB has no intent of taking action against them.  They just want to see how it goes.  They acknowledge Upstart’s way may potentially be better, but they also realize they need to watch things closely. 

The letter states that Upstart must report lending and compliance information to the Bureau to reduce risk.  The goal is for the bureau to gain an understanding of the real-world impact of alternative data use for lending decision making.

What Exactly Does Upstart Have to Report? 

Upstart peer to peer shares information with the CFPB about:

• Loan applications received
• The decision approval process
• How their model reduces risk to consumers
• How the model expands access to credit for traditionally underserved populations
• Application of management systems for compliance

Upstart Peer to Peer: Is it Really So New? 

You can already ask landlords and utilities to report payments to the credit agencies to give your score a boost. Using this information in lending decisions is not a totally new concept.  Of course, this is an indirect use as it is still rolled into your credit score. 

Upstart peer to peer reviews this type of information along with education and employment history. The theory is that, despite a not so great credit score, you may still be a great borrower.  They find that a solid education and stable job experience also reduce the credit of a borrower. 

Upstart Peer to Peer: So Does it Work? 

Of course, it’s really hard to tell how well something like this works during easy economic times.  Since the company has been in operation, opening in 2012, that’s what we’ve had.  That is, until COVID-19.  The pandemic and the recession that followed has been the true test.  According to co-found Paul Gu: 

“No one expected the timing and cause of this crisis. When you look at how predictive Upstart’s scoring of loans against something like a FICO score, we see that Upstart was 5 times as predictive as traditional FICO. When you look at the results of our platform across all banks, we ended up at the end of May with a 5.8% hardship rate. That’s almost 50% less than industry benchmarks.”

Upstart Peer to Peer: Products

They offer various types of financing products. These range from credit card refinancing to student loans and pretty much anything in-between.  Debt consolidation and personal loans are included, as well as business loans. Most recently they have added auto loans to the menu.

Quotes are available online in a matter of minutes.  The most you can borrow for a business loan is $50,000.  Just to check out the process, I got a quote to see if it was as easy as they said it would be.

The Quote Process

First, I had to enter how much I wanted to borrow.  This is how I know the maximum is $50,000. I tried $100,000 and got an error message that said the amount had to be $50,000 or below.  Later I realized it says it right there on the screen.  I decided to go big and ask for all $50,000. 

Next, I had to tell them my why for the loan.  Of course, I went with a business loan.  After that they asked for name, birthdate, and contact information.  The form also asks for the highest level of education and primary source of income, as well as how much you have in savings and recent loan history.

Then, they want to know how you heard about Upstart.  You will also have to click to agree to the terms.  I got my quote almost instantly after I hit submit, and it was a soft pull on credit so there was no impact on the credit score.  Of course before closing, should you choose to pursue the loan, they would make a hard pull on your credit report. 

I found it intriguing that I could use the quote tool to play with different amounts and terms to see the various interest rate possibilities.  In general, business loans are available in amounts from $1,000 to $50,000.  Interest rates range up to 35.99%.  You can choose either a 3 year or 5-year repayment term. 

There is no penalty for prepayment, and usually funds are available the next day after approval. Keep in mind these types of details can change with the market, so check with the lender directly for the most current information.

Upstart Peer to Peer: The Verdict? 

This is a young company.  Their true impact remains to be seen.  The fact that the CFPB is watching them and wants to learn more without taking action is promising. Also promising is the fact that their loans have done so well compared to those of traditional lenders during the COVID-19 pandemic and resulting recession. They are accredited by the BBB and have an A+ rating.  I say if you need money to start your business, Upstart peer to peer lending it worth a try.  They seem to be on to something.