There’s been a lot of attention paid to peer-to-peer lending sites such as Lending Club and Prosper. And it’s true, each one offers a lightning-quick application process, with potential approval coming right on its heels.
But other than the sky-high interest rates these sites can charge (maxing out at 29.99 percent APR for Lending Club, and 35.26 percent APR for Prosper), another big issue looms for borrowers of a young age. Assuming that you’re just getting your credit act together, chances are your file is just too thin to obtain a loan from either source, or a conventional bank. And if you do, you’ll pay through the nose.
That’s what makes a new online service called Upstart so compelling. With two founders in the Money Under 30 age range, its mission is to get three-year loans to young adults (between $5,000 and $25,000) who otherwise wouldn’t qualify because they don’t have enough of a credit history.
Nobody knows this better than Paul Gu, one of the co-founders of Upstart. He went to both Prosper and Lending Club looking for a loan. He was rejected by the former, and offered one of those lofty interest rates in the 20s by the latter.
There’s another number in the 20s: Gu’s age. When he got the news — this after being rejected for a rewards credit card, too — “It didn’t make sense to me,” he says. “I had high income, no debt, and had never been late on a payment. The data said that as someone who studied economics and computer science at Yale, I wasn’t at high risk of future unemployment, so that wasn’t the explanation.”
Gu was also a Thiel Fellow, too; Thiel Fellows are given a no-strings-attached grant of $100,000 to skip college and focus on their work, research and self-education.
After digging around, Gu learned that with peer-to-peer lending platforms, “they outright rejected anyone with less than three years of credit history, and less than 3 percent of their loans went to those with less than six years of credit history.”
Where other young men of 22 might’ve just thrown their hands up in the air, Gu used them to build something new. He teamed up with Dave Girouard, former president of Google Enterprise, to get Upstart off the ground about two years ago with a third partner, Anna Mongayt, an ex-Google employee in her early 30s. After raising close to $6 million, they released their loan product roughly three months ago, with interest rates ranging from about 6 percent to 21.99 percent.
“We’ve already originated a few million dollars in loans already and our growth rate is more than 100 percent month to month,” Girouard says.
While Girouard doesn’t have the same story as Gu, his motivation is similar: “After working at Google for 8 years, I left with some colleagues to investigate ways to provide credit to people just beginning their careers,” he says. “We noticed that the financial services industry doesn’t serve younger borrowers particularly well, due to lack of credit history. We realized that there’s plenty of data about an individual that can help understand their creditworthiness.”
In other words, a FICO score might not tell the whole story. Think of the baseball movie “Moneyball,” where general manager Billy Bean uses statistics other than just batting average and earned run average to find the players other teams ignored. It’s a bit like that with an Upstart loan. “In fact, it’s much the same data we were using to make hiring decision at Google: schools attended, area of study, academic performance and work history,” Girouard says.
Now, that’s not to say that FICO scores don’t serve a valuable purpose. Invented by the onetime Fair Isaac Corporation (hence the name) FICOs remain a standard used to check a borrower’s credit-worthiness. FICO scores of 700 or higher are considered good (850 is the maximum), and are calculated from information provided by the three major credit bureaus: TransUnion, Experian and Equifax.
But let’s check that key term: credit worthiness. Does a young adult without a lengthy credit history qualify for an automatic rejection? This columnist hardly thinks so, and neither do the folks at Upstart. But that’s not to say they’ll hand you the money no questions asked, either. Remember, two of the co-founders are ex-Google folks, so there has to be some heavy numbers crunching involved.
“We have large datasets that help us draw correlations between these educational factors and the likelihood that someone can and will repay a loan,” Girouard says. Yet much of it is intuitive, too. “For example, computer scientists and nurses rarely experience long-term unemployment, so they’re a relatively safer bet. And the person who cared deeply about his or her grades and GPA in college a few years ago is the same person that is likely to care about their FICO score today, and to promptly make loan payments.”
Upstart will also evaluate your debt-to-income ratio and your FICO score, assuming you have one. If you want to get started with the process, visit them at the Upstart website. Some things to keep in mind before you decide for try Upstart for a loan:
- You need a college degree, or need to graduate in the next six months, to be eligible.
- You’ll also need a full-time job or full-time job offer starting in six months, unless you are accepted into one of Upstart’s partner bootcamps.
- Even though you don’t need a FICO score to apply on Upstart, it’s important to know that if you do have one, it must be at least 640.
- If you get the loan, you’ll be charged an origination fee of 1 to 5 percent, deducted from the loan proceeds before you get them.
And as always — especially if you have a FICO score and it’s in the 700 range — it pays to shop around for credit options. You may decide Upstart is for you, or perhaps you can get a good deal on another kind of personal loan.
But if you’re like Gu and you’re credit file’s lacking, options like Upstart may represent your best shot at a loan … unless you can get something for 0 percent interest from the Bank of Mom and Dad.