The fintech Upstart is planning to work with banks and credit unions to offer a product that has heretofore been rare: small-dollar consumer loans at annual percentage rates below 36%.
The San Mateo, California-based company, which already partners with banks and credit unions on installment loans and auto loans, announced plans Tuesday to help supply credit to consumers who need emergency cash.
Such loans are typically 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 start offering the product, which is still in development, to banks and credit unions by the end of next year.
“It offers reasonable rates to people for short-term loans, and that’s something that almost doesn’t exist out there,” Upstart co-founder and CEO Dave Girouard said in an interview.
Most banks have steered clear from offering emergency loans of a few hundred dollars, particularly since the demise of deposit-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 necessary to achieve profitability.
Federal bank regulators last year nudged banks to get into the small-dollar loan market, and the Consumer Financial Protection Bureau gave banks a template for doing so without fear of a supervisory crackdown. The National Credit Union Administration has also sought to encourage loans that help consumers manage their short-term cash flow.
Still, financial institutions may still be waiting to see whether Biden-appointed regulators adopt a less permissive approach.
When asked about how regulatory expectations may evolve, Girouard said regulators are supportive of small-dollar loans as long as they are affordable and do not “lead consumers down a dangerous path” of constantly rolling over debt.
Banks offering such loans could help consumers save “enormous amounts of money” by giving them a cheaper option than a payday loan, said Alex Horowitz, principal officer at The Pew Charitable Trusts’ consumer finance project. Pew has established a set of recommendations for banks and credit unions interested in entering the market.
While some banks have built small-dollar loan programs — Bank of America, U.S. Bancorp, and Fifth Third Bancorp all offer such loans — fintech companies can help smaller institutions overcome the technological obstacles of doing so, Horowitz said.
“To build out an automated system and the expertise needed to underwrite based on account history and cash flow is a real obstacle for small and medium-sized banks,” Horowitz said.
Upstart has said that its software considers 1,600 data points to determine a prospective borrower’s creditworthiness, including the college the applicant attended, the degree the person obtained and the profession he or she is entering.
Upstart, which went public last year, works with banks and credit unions to offer auto loans and personal loans of at least $1,000. The company says that it currently partners with 31 financial institutions. Since September, Upstart has announced partnerships with Berkshire Hills Bancorp in Boston and Delaware-based WSFS Financial.
Interest among Upstart’s bank and credit union partners in offering smaller loans has been “off the charts,” Girouard told analysts in an earnings call on 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 “mainstream 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 that some consumers likely will not qualify for loans with APRs below 36%. “But our goal is to bring as many of them inside as we can,” he said.
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