Entrepreneur

When Harvard helps: Upstart digs through your ed background before giving you a loan

Above: Harvard University campus in Cambridge, Mass.

If you spent more college mornings nursing a hangover than attending Anthropology 101, good luck getting an Upstart loan.

Founded by Google veterans, the crowdfunding startup today expanded its offerings to include a more traditional, fixed-rate loan product (the site also lets investors back young folks for a portion of their future income).

But “more” is a key word here: These loans are far from traditional. Upstart considers all sorts of unconventional factors, including what school prospective borrowers attended, what they majored in, and how they performed, among other data points.

Dave Girouard, former president at Google Enterprise and current Upstart CEO

Above: Dave Girouard, former president at Google Enterprise and current Upstart CEO

“Those variables are actually predictive of default rates on loans, and they’re also predictive of earning potential,” Upstart CEO Dave Girouard told VentureBeat.

The company can measure input from more than 1,000 different U.S. universities, all of which have different majors and grading systems. Upstart verifies that data by requiring documents from the borrower and performing its own due diligence.

That educational data, alongside credit and income history, enables Upstart to predict the likelihood of successful loan payments. Upstart’s algorithm runs simulations measuring expected income against expected expenses. It also considers the likelihood of extended unemployment, which is the primary reason people default on loans.

“What’s really different is we don’t just look at your current income, we actually have built a model for your employability,” said Girouard.

That risk assessment model determines loan interest rates, which fall between 6.5 percent and 20 percent, and the origination fee, the 1 to 5 percent of the loan amount Upstart keeps for itself. The actual loan values range from $5,000 to $25,000.

Young doesn’t always mean risky

Upstart’s loans are crowdfunded and anonymized, which means investors contribute to Upstart-vetted borrowers without ever knowing who they are. Moreover, the three-year loans are targeted at young people, who other lenders typically view as “high risk.”

But Upstart thinks otherwise. The startup pointed to a recent study from the Federal Reserve Bank of Richmond, which determined young borrowers are the least likely to experience a serious credit card default.

Armed with that knowledge, Upstart set out to make its loans available to recent grads or soon-to-graduate students — a population that has historically struggled to borrow money at reasonable rates.

“We think it’s a really unmet need in the market… for whatever reason, most lenders avoid this part of the market because they don’t know how to underwrite it,” said Girouard.  “I don’t come from financial services, nor does the rest of our team, so we figured there must be a better way to determine creditworthiness.”

Upstart’s crowdfunded loans bring the startup into competition with Lending Club and Prosper. But unlike those sites, Upstart allows borrowers to use their loans for educational expenses.

In fact, Girouard initially realized there was demand for a fixed-rate loan product when people signed up for an income share agreement (Upstart’s original product) in order to finance coding bootcamp tuition.

“We started to see a lot of people last fall joining up who were not entrepreneurs, but to go to one of these coding bootcamps,” he said. “When we dug into it, we found that they really didn’t have better options.”

By Wednesday afternoon, just hours after Upstart began offering fixed-rate loans, around 150 people had already applied for one, said Girouard. In contrast, only 330 people have tried to raise money through an Upstart income sharing agreement — and that product has been available for 15 months.

Founded in 2012, Upstart has raised around $7.6 million from several institutional investors, including Google Ventures, Kleiner Perkins, Khosla Ventures, Founder’s Fund, and First Round Capital. It’s based in Palo Alto, Calif., and currently has 15 employees.

More about the companies and people from this article:

Upstart was founded by a team of ex-Googlers with a simple idea - to help you do what you’re meant to do. Upstart aims to help you with the most important part of pursuing your dreams - taking the first step. It may be as simple as a... read more »

Dave founded Upstart after 8 years at Google where he was President of Google Enterprise and VP of Apps. Dave graduated from Dartmouth College with an AB in Engineering Sciences and a BE in Computer Engineering. He also received an MBA... read more »

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