Upstart is one of the newer peer-to-peer (P2P) lending platforms available on the Internet. But the platform is coming up quickly, drawing interest from both borrowers and investors. Despite the fact that the service is barely two years old, Upstart could be one of the better P2P platforms to use, whether you are a borrower or an investor.
About Upstart
Based in Palo Alto, California, Upstart is a peer-to-peer lending platform that began operations in 2014. Despite Upstart’s tender age, the platform has already arranged more than $300 million in loans. The company was “founded by ex-Googlers” (former Google employees) to provide personal loans using very different lending criteria than is common even for P2P lenders, to say nothing of banks.
All loans made through Upstart are made by Cross River Bank, which is an FDIC insured commercial bank that is chartered in New Jersey, but funded through independent investors.
Upstart Borrowing Review
In most respects, borrowing through Upstart is similar to the process on other P2P lending sites, like Lending Club and Prosper. The application is completed entirely online, your loan request – if you qualify – is graded and priced, then the loan is funded.
But what makes Upstart different is the way they underwrite your loan. They check your credit score, your years of credit, and your job history, just like every other lender does. But those aren’t the only criteria that Upstart uses in determining whether or not to make a loan to you. They also consider your education and your area of study.
The idea is that “you are more than your credit score”. Upstart also considers your future potential, which they believe is demonstrated through your education experience. They will take into consideration the college that you graduated from, your grade point average, and your major – obviously certain major fields of study are considered to be an advantage from a lending standpoint. The Upstart system seeks to identify and make loans to what it refers to as “future prime” borrowers.
The Upstart target borrower. Because of the consideration of a borrower’s education, Upstart is well suited to new and recent college graduates. The company is less concerned with how deep your credit history is, or even your employment history. Your potential for future income becomes an essential consideration.
Traditional loan requirements. Upstart does require that you have a minimum credit score of 640, however there is no minimum credit history requirement. You must also not have any bankruptcies or other negative public records on your credit report.
There is also no required minimum income level, nor is there a maximum debt-to-income ratio (DTI). That could be a major advantage if a bank turned you down for a loan due to insufficient income.
Minimum/maximum loan amounts.The minimum loan amount on Upstart is $3,000, and the maximum is $35,000.
Loan term. There are two loan terms available with Upstart, 36 months or 60 months.
Loan purpose. Upstarts loans are generally classified as personal loans, but you can use them for just about any purpose you can imagine. For example you can use the proceeds to pay off credit cards, consolidate debt, refinance student loans, take a course for boot camp, pay for college or graduate school, make a large purchase, relocate, pay medical bills, start or expand the business, buy a car or anything else that you like.
Loan qualifications. In order to qualify for a loan with Upstart, you must be a US citizen or permanent resident alien, be at least 18, not live in West Virginia, have a valid email account, be able to verify your name, date of birth, and Social Security number, have a full-time job or a full-time job offer starting within six months, or a steady part-time job or other source of regular income, and have a US bank account.
Application process. The application is online, and requests information about your academic credentials, work experience and the purpose of the loan. All information provided on the application must prove to be correct. You can complete the application in as little as two minutes.
If you accept your loan no later than 5:00 pm (Eastern Time), your loan proceeds will generally be available on the next business day. Otherwise they should arrive after two business days. However, if the loan is being used for education purposes, there is a three day waiting period between when you accept your loan, and when the funds arrive. In any event, the loan proceeds will be wired to your bank account.
Documentation requirements. Upstart will run your credit report, and you will need to upload documents that support your income. If you are a full-time employee you’ll need to provide your most recent pay stub. If you will be qualifying using bonus or commission income, you will need an offer letter from the employer spelling out the terms and expected income. If you have multiple jobs, you will need the latest pay stub for each.
Rental income will require a copy of a lease on the rented property. And if you are self-employed, they will need the most recent year’s income tax return, as well as copies of current year’s invoices.
And since your college background is an important part of the loan evaluation process, you may also need to furnish a copy of your college transcript. A college transcript will be required if you graduated within four years of your application date.
One more point on income, and it’s a big one. Since the loan that you will be applying for on Upstart is a personal loan, you cannot include other household income on your application. That includes your spouse’s income, if you’re married. Your qualification is based on your income only.
What if you lose your job and can’t make the payments? Upstart doesn’t provide specific information on this point, but they do make the following claim on the website:
“If you are experiencing hardship and cannot pay, please contact us immediately. If you are unable to pay, we may be able to work on an alternative payment plan that will avoid additional fees or penalties.”
You also have the option to change your monthly payment date to better suit your schedule. However, the new payment date needs to be set before your actual due date, otherwise you will accrue additional interest.
Collateral. There’s more good news here; Upstart doesn’t require collateral on any of its loans.
Interest rate and fees. Your interest rate is generated by the model and is based on your application and a “soft pull” of your credit report. Rates range from 4.66% APR to 29.99% APR for a 36 month loan, and between 6.00% APR and 27.32% for 60 month loans.
Like many other P2P lenders, Upstart does charge an origination fee. That fee is equal to between 1% and 6% of the loan amount (putting it squarely in line with Prosper and the other lenders). However, there is no prepayment penalty should you choose to payoff your loan early.
Upstart Investing Review
Upstart is all about lending money to borrowers, but it’s equally accommodating if you want to join the platform as an investor.
Here are the highlights:
Minimum investment. You need just $100 to open an account and invest with Upstart.
Loan quality. Upstart claims that about 98% of their loans are either current or are paid in full. Only about 1.1% of their loans are more than 30 days late, and just 1.2% are listed as charged off.
Borrower quality. The good experience that Upstart has on its loans has to do with the profile of the typical Upstart borrower. Here are some statistics:
- Average FICO score: 691
- Average income: $105,842
- College graduates: 90.9%
- Refinancing credit cards: 76.2%
Refinancing credit cards needs some explanation as to why it is seen as a positive factor as a borrower profile. Loans generally perform better when they represent some form of refinance of existing debt. If the borrower has successfully managed that debt in the past, there is a credit track record, and a better chance that the new financing will be similarly well-managed.
In a borrower is using a new loan from Upstart to replace high-interest revolving credit card debt, with a fixed rate installment loan, the borrower’s financial situation improves immediately, particularly if the new monthly payment is lower than what the total payments were on the credit cards that were refinanced.
Expected Returns. As you’ll see below, you can expect to earn rates of interest on your Upstart loan portfolio that are well above what are available through banks and brokerage firms.
Here are the modeled returns listed on the site, based on loan grade:
- AAA – 3 year loans 3.79%; 5 year loans 5.67%
- AA – 3 year loans 4.50%; 5 year loans 6.18%
- A – 3 year loans 5.60%; 5 year loans 7.14%
- B – 3 year loans 6.88%; 5 year loans 9.13%
- C – 3 year loans 7.93%; 5 year loans 11.92%
- D – 3 year loans 9.01%; 5 year loans 13.67%
- E – 3 year loans 10.57%; 5 year loans 15.57%
Modeled returns for each grade and loan term are net of the annual loss rate, which is different for each grade and term. For example, on AAA loans the annual loss rate is less than 0.1% on three year loans, and less than 1% on five year loans. At the opposite end of the spectrum, there is a 13.60% annual loss rate on three year loan grade E loans, and 11.19% on five year loan grade E loans.
Income tax reporting. Upstart will report taxable interest income earned on your account with the filing of Form 1099-INT with the IRS. Naturally, you will receive a copy of the document, which must be sent to you no later than January 31, following the year in which the interest income was earned.
Income taxes may be withheld from your interest income for a number of reasons. If you did not complete lRS Form W-9 when you opened your account with Upstart, then withholding will be required. It may also be necessary in the event that the name, Social Security number or taxpayer identification number that you provided to Upstart doesn’t match IRS records. In addition, withholding will take place if Upstart is notified by the IRS that it is required for any purpose.
Withdrawing funds from Upstart. You can have cash balances in your Upstart investment account transferred to your bank account at any time you choose. There can be a delay of up to seven business days with the transfer, depending upon your bank.
IRA accounts are available with Upstart. You can set up a self-directed IRA account with Upstart that allows you to invest in loans through the platform. Given that interest rates are so low at banks and brokerage firms, the higher interest income that an Upstart account can provide could make an excellent place to hold your fixed income IRA allocation.
Fees. There’s really good news here – Upstart charges no fees to investors. What’s more, Upstart doesn’t earn fees on loans that default. Even better, if the loan defaults, Upstart turns the fees that were collected when the loan was originated over to investors in the loan. This is where that origination fee of between 1% and 5% of the loan amount could loom large.
No FDIC or SIPC insurance coverage! There is one caveat in regard to investing with Upstart. In the event that Upstart goes out of business, there is no federally sponsored insurance agency or fund that will cover your investment with the platform. However, this is another factor that is common with P2P platforms.
Upstart claims that they have a backup servicer and administrator in place so that the loans held for the platform will continue to be serviced, and you will get paid as an investor in those loans.
Upstart Review Summary
If you are a borrower, Upstart uses innovative methods in approving loans. This is an excellent loan source if you are recently out of college, and have not fully established yourself financially, or if your bank thinks your income is insufficient to support a loan. The platform will accept a very short employment history, or even a written promise of employment. It gives you an opportunity to be approved for a loan, even though banks may decline your application.
From an investor standpoint, Upstart’s loan quality is providing solid returns. The emphasis on “future prime” borrowers may be allowing Upstart to tap into a market that other lenders are ignoring. That assures more good investment opportunities in the future.
Whether you’re looking to borrow or to invest, check out Upstart as one of the P2P possibilities.
