Upstart Loans: A Comprehensive Review

Upstart is a personal loans marketplace that provides loans to borrowers with high income potential, but who may not have much in the way of credit history. While traditional banks require an established credit report and a substantial employment history, Upstart looks at a host of other variables when determining the credit risk of an applicant. Not only is Upstart flexible with its eligibility criteria, but also offers loans of up to $35,000 and rates as low as 4.66% APR.

Prime rates for young borrowers with little to no credit history?

If that sounds too good to be true, it’s because there are a few caveats to consider. But that doesn’t mean Upstart loans aren’t a great deal. On the contrary, for the right applicant, Upstart could well be the best lender around. This review will look into the terms and rates offered by Upstart and compare it to similar lenders. We will also take a detailed look at Upstart’s application process and eligibility criteria.

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Upstart’s Backstory

Upstart was founded in 2012 by Dave Girouard, Paul Gu, and Anna Counselman. All of them are ex-google workers who decided to use their data science know-how to change the way credit risk is calculated. According to Girouard, 80% to 85% of people in the United States have never defaulted on a loan and are unlikely to do so. However, because of their FICO score, only a third of them qualify for prime rates. Upstart’s founders feel the system is broken and that their proprietary underwriting model does a better job of identifying high-quality borrowers. As of December 2015, Upstart has received $53.15 million in equity funding. The company is based in Palo Alto, California. Since it was founded, Upstart has financed over 17,000 loans.

When Upstart was first launched, it offered Income Share Agreements to borrowers. These agreements allowed people to borrow money in exchange for a percent of their future income for up to 10 years. If borrowers didn’t make enough money during a given year to meet a previously agreed upon minimum payment, an additional year was added to the agreement. This method was not necessarily cheaper than traditional loans, but it offered additional flexibility. Borrowers could afford to take more risks, start a business, and take on additional education because they weren’t tied to fixed payments. However, Income Share Agreements never really caught on with borrowers and were discontinued in May 2014. Now, Upstart only offers traditional 36-month loans.

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How Does Upstart Work?

Upstart is not a direct lender. Instead, it is a lending platform that connects borrowers with an assortment of retail and institutional investors. Upstart performs all the underwriting and credit analysis for investors who don’t want the hassle of arranging and servicing loans. As of November 2015, 98% of Upstart’s loans are current and performing well. However, Upstart’s lending model allows for a default rate of up to 5% of principal.

How can lenders withstand such a high default rate? Upstart offers lenders the expectation of earning rates of around 7% and the average interest rate of an Upstart loan is between 11% and 15%.

How Does Upstart Make Money? Upstart makes money by charging fees to both borrowers and lenders. According to Dave Girouard, Upstart’s CEO and co-founder, Upstart makes around 5% off the principal of every loan.

Who Does Upstart Target?

Upstart is in the business of lending money to future prime borrowers. What sets its model apart from many other lenders is that it bases credit risk not so much on the past of borrowers but on what borrowers are expected to earn in the future. Upstart does this by attempting to identify well educated and motivated borrowers who are likely to achieve financial success before other lenders do.

So what does Upstart look for when identifying future prime borrowers? Earning a degree from a top university helps a lot. But so does your area of study and your employment history. For example, a registered nurse may receive just as good a rate as a literature major from an Ivy League university because Upstart’s credit model focuses on earning potential. Borrowers with advanced degrees and good grades on standardized tests, such as SAT and ACT, can also expect better rates with Upstart. Generally, borrowers must have a FICO score of at least 640, stable employment, and an income of at least $40,000 a year. However, borrowers who are attending a partner bootcamp are exempt from the employment requirement.

Upstart still cares about borrowers’ credit history, but it is willing to look at a variety of markers of prime borrowers depending on each applicant’s credit profile. If you have an established credit history, Upstart will focus on that. If you don’t have much of a credit history (less than 10 years), Upstart will concentrate on other variables, such as your academic performance.

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What Are Upstart’s Rates And Terms?

Upstart offers fixed interest rates ranging from 4.66% to 25.26% APR. This rate includes Upstart’s origination fee, which ranges from 1% to 6% depending on the borrower’s credit grade. Origination fees are included in the loan’s APR but are deducted from the loan balance before it’s deposited. For example, if you borrow $30,000, and you’re charged a 5% origination fee, you will only receive $28,500 in your bank account. However, you will pay interest on the entire $30,000. Check Upstart’s SuperMoney profile page for the latest rates.

Loan amounts range from a minimum of $3,000 to $35,000. Loans have terms of three or five years, but there is no prepayment penalty so borrowers can pay off loans early.

There is a late fee of $15 or of 5% of the payment amount, whichever is larger. There are no fees for paying with a personal check, as with other lenders.

What Are Upstart’s Credit Requirements?

Because of Upstart’s flexible credit analysis model, its minimum credit criteria is short:

  • Have a credit score of at least 640
  • Have a full-time job or a job offer
  • Have a four-year college degree and be looking for a job
  • And NOT live in West Virginia

The college degree and employment requirements can be waived for applicants who want to use the loan to pay for the tuition of one of the coding boot camps that have partnered with Upstart. Note that Upstart uses TransUnion’s FICO score. It’s not a bad idea to check that there are no mistakes on your credit report with TransUnion before applying.

Apart from that, there is no minimum income, no minimum credit history, and no maximum debt-to-income ratio. However, Upstart does not accept people who have bankruptcies or public records on their report or who have six or more credit inquiries on their credit report for the last six months. Upstart also prefers borrowers not to have a debt ratio above 16%.

What Does A Typical Upstart Borrower Look Like?

The average Upstart borrower is 22 to 35 years old, has a credit score of 692, and a debt-to-income ratio of around 15%. As of December 2015, a typical Upstart loan has an APR of between 11% and 15%. The average loan size is $13,000, and with an APR of say 15%, would require 36 monthly payments of $416 to repay.

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What Is Upstart’s Application Process Like?

Upstart has a simple and easy to complete application process. Here is a detailed walk through. Remember, Upstart only performs a soft credit check at this stage. Checking your rate will not hurt your credit.

  1. Choose the purpose of your loan.

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2. Choose the loan amount and provide an estimate of your credit score.upstart rates 2

3. Provide your level of education and your primary source of income.

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4. Provide some personal information.

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5. Choose your loan and terms.

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6. Confirm your identity and provide your bank account information

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7. Submit supporting documentation and electronically sign your loan contract. 

How Does Upstart Compare to Other Lenders?

Upstart and a small group of similar businesses have created a new way of lending that focuses on the future potential of borrowers and not exclusively on their credit history. Upstart’s rates are similar to those of SoFi, LightStream, and Earnest, but Upstart has more flexible credit score requirements. Upstart has both lower rates and a faster lending process than marketplace loan leaders Prosper and LendingClub.

This is what we love about Upstart:

  • Upstart offers prime rates ranging from 5% to 25% to borrowers with less than perfect credit reports. Its rates are, on average, 30% lower than the rates offered by Prosper and LendingClub, based on data compiled from each company’s website in April 2015. There are only a few online lenders that compete with Upstart on rates, such as SoFi, LendingClub, and Prosper.
  • The application process is quick and easy. If approved, borrowers can receive their money by the next business day.
  • Checking your rate will not affect your credit. Upstart performs a soft credit inquiry that will not ding your credit score.
  • There are no prepayment penalties.
  • Available in all states except West Virginia.

What we don’t love about Upstart:

  • It excludes borrowers without a higher education or a high-income potential. Unfortunately, these exclusions are what allow Upstart to filter out future prime borrowers in the first place.
  • It has a minimum loan amount of $3,000 and a maximum loan of $35,000. Some borrowers may appreciate a lower minimum or a higher maximum. Earnest, for instance, offers loans ranging from $2,000 to $50,000.
  • Longer application process than other online lenders. Upstart must confirm the schools, grades and job offers that borrowers claim to have in their application forms. Cash is deposited within the next business day, but only after a loan is approved, and all necessary documentation is submitted.

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