Fintech lenders are taking an unprecedented step by using artificial intelligence (AI) to offer personal loans to consumers with low or no creditworthiness.
American Banker said a fintech startup credit platform called Upstart will soon offer consumer credit in small dollars at less than 36% APR. This interest rate is significantly lower than what is normally charged on this type of loan, making it a viable alternative to credit cards. In fact, payday lenders charge up to three-digit percentages on these loans. But now, Upstart says it will use AI insurance models to get cheaper rates.
“It gives people reasonable interest rates on short-term loans, and it almost doesn’t exist,” said Upstart co-founder and CEO Dave Girouard in an interview with American Banker.
Upstart said this new offering is still under development but could be available to consumers by the end of 2022.
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AI could improve access to credit
Using AI to write new loans enables lenders to use more data in their loan decision than is available on a credit report. For example, Upstart Personal Loans use more than 1,000 variables to rate each application, which goes beyond traditional creditworthiness and opens up access to credit. the company reported.
In November, Upstart announced that it had partnered with the Office of the Comptroller of the Currency (OCC) ‘s Project Roundtable for Economic Access and Change (REACh) “to promote financial inclusion through better access to credit”. The project brings together leading figures in the banking industry to identify and remove barriers to access to credit.
“In the past, an over-reliance on traditional credit ratings has meant that not everyone has had the opportunity to obtain a loan despite being creditworthy,” said Nat Hoopes, Upstart vice president and head of public policy and regulatory affairs. “Less than half of American adults have access to quality credit, even though four in five Americans have never defaulted on an obligation.”
By using AI, Upstart offers a higher approval rate for traditionally underserved population groups, according to Upstart. In 2020, Upstart’s model approved 30% more black borrowers than a traditional model and offered 11% lower interest rates. Similarly, it approved 27.2% more Hispanic borrowers at a 10.5% lower interest rate.
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CFPB urges banks to offer small personal loans
Since the Biden administration took over, the Consumer Financial Protection Bureau (CFPB) has started take tough action on payday lenders.
“I am pleased that the court reaffirmed our ability to protect borrowers from unfair and abusive payment practices in the payday lending business and other regulated markets,” said CFPB Acting Director Dave Uejio in September after one of the payday loan rules of the Offices came into force was court.
To help banks get into the smaller credit area, Federal Deposit Insurance Corp. (FDIC) issued new guidelines for banks to offer small dollar loans last year. In addition, the CFPB has actively encouraged banks to offer small dollar loans and even released a template to help them comply with the office’s banking regulations.
With today’s technology and AI, lenders can get a better picture of consumer behavior and creditworthiness, which allows them to expand access to credit and lower interest rates as they take less risk.
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