The latest generation of college grads often face an uphill battle once they’re out in the real world. Many of them are saddled with student loan debt while some are also struggling to keep up with the minimum payments on their credit cards. With the job market still wobbly, finding a way to pay all of it off can seem overwhelming.
Thanks to tighter lending restrictions, getting a loan from a bank or credit union isn’t exactly a piece of cake these days, especially for young adults who haven’t had time to establish a lengthy credit history. Peer-to-peer lenders like Prosper and Lending Club are other options, but a low credit score can still be an obstacle to approval.
Upstart is a relatively new addition to the peer-to-peer realm that’s geared specifically towards the younger crowd. The company offers unsecured loans ranging from $3,000 to $25,000 that can be used for things like consolidating debt or paying off student loans. Upstart strays slightly from the typical lending model, so borrowers need to be clear on how it stacks up against banks and other P2P platforms before they apply. I’ve outlined how Upstart compares to a bank when it comes to things like loan qualification, fees and interest.
Qualifying for a loan
The biggest difference with Upstart is the criteria that’s used to make approval decisions. Beyond the normal range of things like income, work history and credit scores, an applicant’s creditworthiness is based in part on their education. The idea is that factors like where you went to school, what kind of degree you earned and how you performed academically are good indicators for determining your likelihood of repaying the loan.
Company co-founder Anna Counselman believes it’s that unique focus that sets Upstart apart from other lenders. “When someone in the financial services industry looks at a person, they focus on FICO scores. Since young people may not have long credit histories, they fall into the high-risk bucket,” Counselman said. “Upstart allows you to monetize the work you put into your education.”
To apply, you have to have earned at least an associate’s degree or be within six months of graduating. In terms of your FICO score, 640 is the minimum but it’s possible to get approved if you don’t have a score because of an insufficient credit history. Upstart looks at your debt-to-income ratio and whether you have any delinquencies, collection accounts or bankruptcies on your credit report. Aside from your education, these are the same things a bank, credit union or peer-to-peer lender would consider.
Winner (for qualifying): Upstart
Banks and credit unions typically require a much higher minimum FICO score for approval. The 640 score that Upstart mandates is similar to what you’d find on other peer-to-peer platforms but you get the added benefit of having your education factored in.
That’s a major advantage compared to traditional lenders, according to borrower Brady H., a marketing specialist with a financial services background. “They’re giving people the benefit of the doubt,” he said. “A lot of people my age are stuck in debt and if they do apply for a loan, it’s going to be at a higher interest rate.”
How the fees and interest add up
Any time you plan on taking out a loan, looking at the interest rates and fees should be your first move. Currently, Upstart offers an APR ranging from 6.68 to 29.99 percent. You’ll also pay a one-time origination fee that equals between 1 and 6 percent of the loan amount. Generally, a lower APR means a lower fee.
Compared to other peer to peer lenders, Upstart’s rates are competitive. Prosper, for example, features an APR of 6.73 to 34.12 percent, depending on your credit score. For a three-year loan from Lending Club, the rates go from 6.78 percent to 29.99 percent. Origination fees are slightly lower for both lenders, topping out at five percent.
If you look at traditional banks, you start to see the numbers shift a little. TD Bank, for instance, offers unsecured personal loans ranging from $2,000 to $50,000 with a maximum APR of 9.2 percent for a five-year term. The more you borrow, the lower the APR and the origination fee is capped at $50. Citibank, by comparison, offers fixed rate loans with APRs between 8.99 and 20.74 percent, with limits up to $50,000.
Winner (for fees and interest): Split decision
Upstart has a slight edge for younger borrowers who are able to qualify for the best APR, whether you’re looking at traditional or peer-to-peer lenders. On average, loans are approved at rates that are 30 percent lower than what you’d find elsewhere.
When it comes to the fees, however, it’s not as clear-cut. If you borrow the minimum amount of $3,000 and get stuck with the 6 percent origination fee, that adds up to $180. You’re only getting a better deal than what the bank offers if you’re able to snag the lowest rate.
The application process
Going the traditional route for a loan usually means sifting through mounds of paperwork to find your tax returns or pay stubs and waiting for days or even weeks on end to hear if you’ve been approved. With Upstart, you just have to answer a few questions about how much you want to borrow, what you plan to use the money for and verify your information. You’ll know within three minutes whether you’ve been approved and the money can be in your bank account by the next day.
For Tamir Nadav, a senior producer in the gaming industry, the streamlined design of the online application and quick turnaround for loan funding ranked high on the list of reasons why he chose a loan from Upstart. “As opposed to going into a bank, it’s just easier to use,” Nadav said.
Winner (for applying): Upstart
Having been through the loan process, I know what a hassle it is to get all the forms together and fill out a lengthy application. Inevitably, you forget something or your loan officer goes on vacation and you’re stuck wondering whether you’ll ever hear anything. As far as wait times go, I’ll take three minutes over three weeks any day.
Impact on your credit
Your payment history makes up the biggest part of your FICO score and most lenders, including Upstart, report your account activity to three major credit bureaus. If you pay late or skip a month altogether, you can expect it to show up your credit. Any time you consolidate using a new loan, it shifts your credit-to-debt ratio, which can help to improve your score. Where Upstart gets extra points is the application process. Unlike other lenders, the inquiry doesn’t count as a “hard pull” so you don’t have to worry about your score getting knocked down a little.
Winner (for impact on credit): Upstart, by a nose
I give this one to Upstart, based on the fact that simply applying won’t go against your credit. One or two points might not seem like much but it can count for a lot for borrowers who are right on the edge of falling below the minimum score requirements.
Final thoughts on borrowing from Upstart
Upstart takes an innovative approach to the lending game and it’s easy to see how it would appeal to someone who’s in their 20s or 30s and is working to get rid of their debt while improving their credit. If you’re able to substantially reduce the amount of interest you’re having to pay, that savings can help to offset the potentially higher origination fee. Whether you decide to go with Upstart or another lender really comes down to what kind of terms you’re being offered. Either way, the most important thing is to take action to deal with your debt, a point that’s emphasized by Counselman.
“Young people tend to worry about their finances and let these things linger,” she said. “There’s no reason to be paying excessive interest rates when there’s a better option.”