FinTech Upstart plans to work with banks and credit unions to offer a hitherto scarce product: small dollar consumer loans at annual percentage rates of less than 36%.
The San Mateo, Calif., Based company, which is already partnering with banks and credit unions for installment and auto loans, on Tuesday announced plans to help provide credit to consumers in need. emergency cash flow.
Such loans are usually quite expensive – payday lenders often charge triple-digit annual percentage rates – but Upstart says its artificial intelligence underwriting models will allow loans with APRs below 36%.
Upstart hopes to start offering the product, which is still under development, to banks and credit unions by the end of next year.
“It offers people reasonable rates for short-term loans, and that’s something that hardly exists there,” said Dave Girouard, co-founder and CEO of Upstart, in an interview.
Most banks have refrained from offering emergency loans of a few hundred dollars, especially since the disappearance of advance loans during the Obama administration. If such loans are too expensive, they risk a backlash from consumer groups and regulators, but banks have long insisted that relatively high interest rates are needed to achieve profitability.
Federal bank regulators last year pushed banks to enter the small loan market, and the Consumer Financial Protection Bureau has given banks a model to do so without fear of repression of surveillance. National administration of credit unions also sought to encourage lending that help consumers manage their cash flow in the short term.
Yet financial institutions can still be wait to see if the regulators Biden-appointed take a less permissive approach.
When asked how regulatory expectations might evolve, Girouard said regulators favor small loans as long as they are affordable and don’t lead consumers down a dangerous path of constantly refinancing their debt.
Banks offering such loans could help consumers save “huge sums of money” by giving them a cheaper option than a payday loan, said Alex Horowitz, senior director of the consumer finance project at The Pew Charitable Trusts. Pew established a set of recommendations for banks and credit unions interested in entering the market.
While some banks have set up lending programs for small dollars – Bank of America, US Bancorp, and Fifth Third Bancorp all offer such loans – fintech companies can help small institutions overcome technological hurdles, a. said Horowitz.
“Building an automated system and the expertise to underwrite based on account history and cash flow is a real hurdle for small and mid-sized banks,” Horowitz said.
Upstart said its software considers 1,600 data points to determine a potential borrower’s creditworthiness, including the college the applicant attended, the degree the person earned, and the profession they are enrolled in.
Upstart, which went public last year, is working with banks and credit unions to offer auto loans and personal loans of at least $ 1,000. The company says it is currently a partner of 31 financial institutions. Since September, Upstart has announced partnerships with Berkshire Hills Bancorp in Boston and WSFS Financial, based in Delaware.
Interest among Upstart’s banking partners and credit unions in offering smaller loans has been “off the charts,” Girouard told analysts during an earnings call on Tuesday.
Many consumers who rely on expensive short-term loans have risky credit scores, which can prevent them from accessing cheaper options.
Upstart’s goal is to bring more Americans into the “traditional financial world,” Girouard said, helping them get cheaper credit and ultimately allowing banks to offer them traditional credit cards, mortgages and other products.
Still, Girouard said some consumers are unlikely to qualify for loans with APRs below 36%. “But our goal is to get as many as possible inside,” he said.