Fintech Upstart plans to work with banks and credit unions to offer a hitherto rare product: small-dollar consumer loans at annual rates below 36%.
The San Mateo, Calif.-based company, which already partners with banks and credit unions for installment loans and auto loans, announced Tuesday plans to help provide credit to consumers who have need emergency cash.
These loans are usually quite expensive — payday lenders often charge triple-digit annual percentage rates — but Upstart says its artificial intelligence underwriting models will enable loans with APRs below 36%.
Upstart hopes to begin offering the product, which is still in 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 almost doesn’t exist there,” Upstart co-founder and CEO Dave Girouard said in an interview. .
Most banks avoided offering emergency loans of a few hundred dollars, especially since the disappearance of loans on account under the Obama administration. If these 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 Banking Regulators Last Year nudged banks to enter the small loan market, and the Consumer Financial Protection Bureau has given banks a model to do so without fear of a surveillance crackdown. National Credit Union Administration also sought to encourage lending that help consumers manage their short-term cash flow.
Nevertheless, financial institutions can still be waiting for to see if Biden-appointed regulators take a less permissive approach.
Asked how regulatory expectations might evolve, Girouard said regulators favor small loans as long as they’re affordable and don’t “lead consumers down a dangerous path” of constantly refinancing debt.
Banks offering such loans could help consumers save “huge amounts of money” by offering them a cheaper option than a payday loan, said Alex Horowitz, senior consumer finance project manager at The Pew Charitable Trusts. Pew has established a set of recommendations for banks and credit unions interested in entering the market.
While some banks have small-dollar loan programs in place — Bank of America, U.S. Bancorp and Fifth Third Bancorp all offer such loans — fintech companies can help smaller institutions overcome technology hurdles, said Horowitz.
“Building an automated system and the expertise to underwrite based on account and cash flow history is a real hurdle for small and medium banks,” Horowitz said.
Upstart said its software takes into account 1,600 data points to determine the creditworthiness of a potential borrower, including the college attended by the applicant, the degree obtained by the person and the profession in which he is entering.
Upstart, which went public last year, works with banks and credit unions to offer car loans and personal loans of at least $1,000. The company says it is currently partnered with 31 financial institutions. Since September, Upstart has announced partnerships with Berkshire Hills Bancorp in Boston and Delaware-based WSFS Financial.
Interest from Upstart’s banking partners and credit unions in offering smaller loans has been “out of the ordinary,” Girouard told analysts on an earnings call Tuesday.
Many consumers who rely on expensive short-term loans have subprime 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 enabling banks to offer them traditional credit cards. mortgages and other products.
Still, Girouard said some consumers probably wouldn’t qualify for loans with APRs below 36%. “But our goal is to bring as many as possible inside,” he said.