Ben Todd | Apr 16, 2017 | 3
Upstart Review – P2P Loans For College Educated People With Poor Credit
Upstart was only launched in May 2014, and yet it has since grown to give out over $500 million in Upstart loans. The company has seen double digit growth on a month-over-month basis. They have done it by ignoring FICO scores (credit ratings) and use other indicators of whether a person will pay back their loans.
The company operates differently by taking a risk on each applicant by mostly ignoring your FICO credit rating and using other indicators. Some people say that Upstart is fairer to unlucky people who have had trouble with their FICO score in the past.
For example, people who have been screwed over their by partner because of co-signing may have an unfair credit score, and the same is true for people who have had their identity stolen.
Upstart looks at other indicators to figure out if you should have a loan. They look at academic performance, work skills, qualifications and work history. After all, a work-shy slacker can have a great credit score, in the same way that a hard-working person may have a poor credit score.
Upstart is yet another peer-to-peer company that is doing great things and offering people a fair deal. Each P2P company has its own special selling point, and Upstart’s biggest selling point is its under-reliance on FICO credit scores.
We Think Peer-To-Peer Companies Are Marvelous
As you may have noticed, our articles often tout the merits of peer-to-peer lending and investing, and that is because we think they are the bee’s knees. The banks have screwed us all in some way, and we have had to sit back and take it, but peer-to-peer lending and investing helps take money out of the banks hands and put it in the consumer’s control.
Also, you cannot discount the fact that people who get involved with legitimate peer-to-peer lending and investing groups/companies often learn quite a bit about investing and money as a whole. They also learn the pleasure of investing by getting to see a real return while knowing where it came from, and we think that’s marvelous.
The Company Paradigm Has A Drawback
There is a reason why other lending companies rely so heavily on credit scores. They do it because it reassures shareholders that they are making wise loan approvals, and credit ratings offer a reasonably reliable view of how a person handles credit.
Another reason that other companies rely on credit scores is because borrowers do. A person wishing to borrow money will spend a lot of time building his or her credit rating, and that is pointless if lending companies do not use them to approve loans.
Upstart doesn’t ignore credit ratings. They do pull a credit rating from a single company called Trans Union, but they only use your credit score as one of many approval factors. This means you may get a loan with Upstart even if you have a bad credit rating.
The drawback is that people with good credit ratings may be rejected. For example, if you have a loan with Upstart, and you apply for another one, you may have an annual income of just under $100,000, and you may have a reasonably good credit rating, but you may still be rejected because the Upstart Company believes you have too many payment obligations already.
Anecdotal Evidence Of Approvals After Rejections
There are unconfirmed reports of online users complaining to Upstart that they were rejected despite their great credit rating, and the Upstart peer-to-peer company has approved their application, but has put them in a very low loan band that charges very high interest rates.
The only reason it was mentioned here is because it is a common story and doesn’t sound too outrageous. However, one has to wonder, if these people had great credit ratings. If so, then why go back to Upstart after a rejection? Surly, if they have a good credit rating, they can also have their pick of lenders.
Also, there was a rumor that if you were an investor with the company for a while, then Upstart will consider you more favorably when you ask for a loan, but I cannot find any evidence that this is true, and the customer support member I asked said she had no idea if it was a factor.
Why Do They Bother Getting Your Credit Rating?
There are two reasons. The first is because if you have a truly terrible credit rating, then they may do a little more research into your case.
The second reason is to judge what loan grade you will be placed into. The loan grade determines whose money you may have access to and how much interest you may enough up paying on your loan.
The other loan approval factors are strictly for approval, but your credit score is marginally for approval, but mostly for deciding which loan band you are placed in.
You Do Not Control The Interest You Pay
Peer-to-peer companies have the right to choose how they operate, and this one chooses to ignore credit ratings. They also remove your ability to choose your interest rate.
Other peer-to-peer companies allow you to pick loans based on the interest rates that investors are offering. For example, if you want $10,000 and the investors are asking for 9% interest, then you may pick that rate, or you may get a lower loan and find investors that have lower interest rates, or simply wait for a lower rate to come along.
Upstart offers a very limited choice when it comes to borrowers and interest rates. You are placed in a loan band that has an interest rate range. For example, in grade AAA, your rate is between 4.0% and 4.35%, whereas in grade E, your rate is between 23.34% and 25.27%.
Investors Choose Their Loan Grade
As an investor, you are able to place your money in the loan band that suits your risk tolerance. For example, if you have $1000 that you really do not want to risk, then put it in grade AAA, and if you fancy taking a risk for a higher return, then put your money in a lower grade.
As you can imagine, there are times when some grades have fewer investors than others. As a result, you may be allowed to go further down the grading band.
Investor’s money is fairly safe. An investor may put money into a safer loan grade if they are not willing to take much of a risk. Either way, around 92% of Upstart’s loans are current or paid in full.
A Fast Decision And A Fast Sign Up
Getting a decision is fast compared to most lending companies, and signing up takes around the same amount of time that it takes to sign up for a Facebook account. You have to enter a slew of different details that you may not usually enter into borrowing websites, but it is just so they may approve you more easily and quickly.
The customer service department is a little hit and miss, but that is nothing new in the lending industry. You may get an irritating customer support staff member when you make contact, but you can always hang up and try again.
The other downside is the fact that the interest rates are a little high. Again, that is the sort of thing you may expect from a company that allows people with poor credit ratings to get loans.
One of the upsides of them having higher interest rates is that they attract more investors. The P2P companies that offer very low interest rates will often struggle to find investors. The opposite is true for Upstart, as they very easily attract investors with their promises of juicy interest rates.
Claims Of Bait And Switch?
If you are thinking about taking out a loan, you will be placed into a loan band. The Upstart company is going to show you the best rates they have on offer in that band. However, there is no guarantee that you will get that rate when you sign your final loan agreement. Here is how it works and why it may feel like a bait and switch deal. This is just a simple hypothetical example to explain how it works.
Grade A has 3 investors in it.
[/\] Bob has $500 invested and he wants 5.49%
[/\] Lisa has $500 invested and she wants 7.80%
[/\] Sam has $500 invested and she wants 8.75%
If you want to borrow $500, then you have to pay a rate of 5.49%. If you wanted to borrow $1000, you would have to 6.65%, and if you wanted to borrow $1500, you would have to pay a rate of 7.35% (the math is 5.49% + 7.80% + 8.75% = 22.04, then 22.04 / 3 = 7.35%).
Donny Dingle may want to borrow $1500 and see the rate of 5.49%. He may take the loan, only to see that his rate is actually 7.35%. He may feel as if he was baited with a lower rate of 5.49%, only to have the rate switched to 7.35%. Yet, if he had only borrowed $500, his rate would have stayed at 5.49%.
Conclusion – High Rates But Plenty Of Investors
If you have a poor credit rating, but you have a job and a good education, then this is the loan company for you. If you have a good credit rating, then maybe give this company a miss. You are going to pay slightly higher interest rates, but they still beat many banks and credit companies. Plus, Upstart has plenty of investors, so your loan is often accepted and processed very quickly. Other peer-to-peer lenders may approve you quickly, but then take days (even weeks) to process your loan while they wait for investors to invest at the rates you demanded. The application process is quick, and the approval process is quicker. Strongly consider this lending company when you are shopping around for peer-to-peer loans.