Upstart’s approach to P2P lending is to heavily incorporate machine learning and artificial intelligence to improve the traditional credit scoring model for individcual consumer loans, in particular loans to younger borrowers with limited credit history. According to the Upstart website “Our proprietary undewriting model identifies high-quality borrowers despite limited credit and employment experience - what we call ‘future prime’ borrowers.”
Types of investments Upstart offers
Investments on Upstart are in unsecured consumer loans. While they are heavily marketed as oriented toward financing education (for example, paying to attend a coding bootcamp), there is no actual restriction on how the proceeds can be used by the borrower. Investors receive principal and interest payments for the life of the loan (loan terms are 36- or 60-months, with no pre-payment penalty).
What do you get when investing with Upstart?
Upstart uses a novel approach among P2P platforms. Loans are originated by a bank, but then are transfered to “Upstart Network Trust”, using a somewhat obscure entity known as a Delaware Statutory Trust, more typically found in real estate investments. Investors receive securities issued by the trust, entitling them to payments from the loan (net of fees).
How does Upstart make money?
Upstart charges a 0.5% annual fee to investors. Via the Upstart FAQ:
The servicing fee will equal to your pro rata portion of an annualized rate of one-half percent (0.5%) of outstanding principal of corresponding loan. This fee is to accrue daily on the outstanding principal amount of each corresponding loan, excluding any corresponding loan that has been terminated, cancelled, charged-off, or referred to a third party collections process. It will be charged on a monthly basis with such amounts being automatically deducted from your investment account.
Potential returns and cashflow
Borrower payments are distributed daily, soon after being received by the Trust.
Upstart does not appear to publish projected returns, though borrower interest rates are in line with other consumer P2P lending platforms (7.39%-30%).
Breadth of offerings on Upstart
Upstart is still a small player in the overall P2P loan ecosystem (they’ve funded $900M of loans as compared with LendingClub’s $28B), but are growing quickly.
Regulatory framework and due diligence expectations
Upstart’s investments are only offered to accredited investors, under SEC Reg D.
In evaluating borrowers, Upstart uses a proprietary set of signals in addition to traditional factors like credit score adn income, including things like GPA, standardized test scores, which college the borrower attends (or attended) and even the particular field of study.