At Online Lender Upstart, Academic Achievement Helps Millennials Land Loans

Requesting a loan from Upstart is a lot like applying for a job at Google Inc. Both companies scour your academic credentials — GPA, alma mater and field of study — and run them through an algorithm that predicts your employability. Google uses the model to pluck the best hires from a vast pool of candidates. At Upstart, a new and somewhat controversial kind of financial institution founded by three ex-Googlers, the data helps determine who is most likely to honor their debts.

The California lending company launched three years ago to solve what its founders saw as a growing problem: People in their 20s and 30s have trouble securing affordable loans, largely because they lack the extensive credit histories that older generations have built up over time. By factoring academic success alongside traditional measures such as credit scores, Upstart believes it can identify low-risk millennial borrowers who are often passed up by traditional banks or are forced to pay sky-high interest rates.

Facing collapse, banks retreated, making it harder for borrowers to obtain loans or secure attractive interest rates

“The whole notion of how personal credit evolved is ‘guilty until proven innocent,’ ” said Dave Girouard, 49, a former president of Google’s Enterprise division who co-founded Upstart with Anna Counselman, 35, and Paul Gu, 24.

“Upstart came to the idea that we could, through some really interesting data science, help people access credit on more favorable terms, and that would be fundamentally a good thing,” Girouard said.

Roughly two-thirds of its borrowers are using the loans to pay off credit card debt, which can carry interest rates nearly double those of Upstart’s. Other borrowers use loans to pay for coding boot camp courses, to relocate for a new job or to purchase a sparkling engagement ring.

“Upstart is responding to a consumer need. That’s what this audience is most interested in: short-term, small loans,” said Mike Sullivan, a consultant for Take Charge America, a nonprofit credit counseling agency in Phoenix. “From a marketing perspective, I think it’s very clever.”

Charles Newport, 29, said he learned about Upstart last year from a banner advertisement on Facebook. He and his wife had just racked up around $9,000 on three credit cards to pay for their destination wedding in Playa del Carmen, Mexico, in . The newlyweds were paying annual interest rates of up to 24 percent and shelling out about $500 a month to pay off the debt.

“My wife and I financed our wedding ourselves, without having a ton of extra cash in the bank,” said Newport, who works in software sales for a tech startup in Chicago.

Newport researched Upstart, then decided to apply online for a three-year loan. The lender offered interest rates at 8 percent, enabling the couple to lower their monthly payments by about a quarter, to $380. They accepted the loan and immediately paid off their credit cards; Upstart now automatically withdraws payments from their bank account. “We’re saving thousands of dollars over the next few years,” Newport said.

Upstart has awarded $185 million across more than 13,000 loans since . In June, Upstart raised $35 million in a third round of venture capital investment from Third Point Ventures to expand operations. The funding is on top of the $800 million it already has raised from institutional investors, including Khosla Ventures, First Round Capital and Collaborative Fund.

The Palo Alto-based company offers three-year personal loans ranging from $3,000 to $35,000, with average annual interest rates of about 11 percent

Upstart is among the handful of online lending platforms to emerge in the wake of the 2008 financial crisis. So Upstart and its larger peers, including Lending Club and Prosper, found a new way to tap the unmet loan demand. Through their digital platforms, the companies match borrowers with investors — including hedge funds, mutual funds and individuals — who earn returns on the loans. Upstart makes its money by charging borrowers an origination fee worth 1 to 6 percent the size of the loan.

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