Online lender Upstart launches auto loan platform
The online lender Upstart is launching an auto lending platform that it will use to make car loans directly and that it will sell to banks and other lenders.
The software incorporates much of the same logic and data modeling in the platform Upstart uses to make personal loans.
Upstart was one of the first fintech online lenders to use alternative data — such as potential borrowers’ cash flows (derived from their bank account information), education and occupation data — and analyze it using artificial intelligence to make automated loan decisions. Upstart received a no-action letter from the Consumer Financial Protection Bureau in 2017 that allowed it to continue using alternative data while the bureau monitored reports showing who was applying for and receiving these loans. The San Mateo, Calif., company says it has made $6 billion in unsecured personal loans to date.
“Auto came very naturally to us,” said Val Gui, general manager at Upstart. “It’s a big market, and there are a lot of people paying way too much for car loans.” The car loan market is about $1.2 trillion, he said.
Upstart's auto loan underwriting model looks at more than 1,500 factors to assess risk, he said. The credit approval process takes minutes. In the application, Upstart automatically finds and fills in information it can find about the borrower's existing car loan, if one exists. It then presents a couple of alternative loan offers among which the car buyer can choose.
Paul Gu, co-founder of Upstart, said the company, through its personal loans and the new auto loans, is lending to people who are not traditionally considered prime credit based on their credit scores, but who actually are creditworthy.
“Credit score and credit history are barriers to people being able to get affordable credit,” Gu said. “They don't reflect the real risk of a person.”
When banks use Upstart's personal lending platform, the company has incorporated their credit philosophy into its model, he said. The same will be true for the auto lending platform.
The company did not say how much it will charge lenders to use the auto lending platform, but Gu said pricing is based on number of loans originated.
“If we aren't able to help the bank actually convert many loans, then we'll share in the downside,” he said.
Many online lenders have struggled during the pandemic. Gu acknowledged Upstart has been affected, too. The company’s payment impairment rate is 5.8% as a result of deferrals and hardship requests. But Gu said that figure is a fraction of what others in the industry are reporting.