Lenders use AI to offer personal loans to borrowers with low credit ratings
Fintech lenders are taking an unprecedented step by using artificial intelligence (AI) to offer personal loans to consumers with low or even no credit.
In fact, a fintech startup lending platform called Upstart will soon be offering small consumer loans at an annual percentage rate (APR) of less than 36% American banker. This interest rate is well below what is typically charged for this type of loan, making it a viable alternative to credit cards. In fact, payday lenders charge up to three-digit percentages for these loans. But now Upstart says it will use AI underwriting models to offer cheaper rates.
“It gives people decent short-term interest rates, and that’s pretty much non-existent,” said Dave Girouard, Upstart’s co-founder and CEO, in an interview with American Banker.
Upstart said this new offering is still in 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 underwrite new loans allows lenders to use more data than is available in a credit report when making their lending decision. For example, Upstart personal loans use more than 1,000 variables to score each application, going beyond traditional credit scores and opening access to credit. the company reported.
In November, Upstart announced that it had partnered with the Office of the Comptroller of the Currency’s (OCC) Project Roundtable for Economic Access and Change (REACh) “to promote financial inclusion through better access to credit.” The project brings together banking industry leaders to identify and remove barriers to access to credit.
“Historically, an over-reliance on traditional credit ratings meant that not everyone had the opportunity to borrow despite having good credit,” said Nat Hoopes, Upstart vice president and head of public policy and regulatory affairs. “Less than half of American adults have access to prime credit, although four in five Americans have never defaulted on a commitment.”
By using AI, Upstart offers a higher approval rating for traditionally underserved populations, 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.
If you want to get a personal loan but have poor credit or no credit at all, you still have options. Visit Credible to start the application process and fill in your information to view options from multiple lenders at once and choose the best personal loan for you.
The Fed was preparing to hike interest rates if inflation continues to rise
CFPB urges banks to offer small personal loans
Since the Biden administration took over, the Consumer Financial Protection Bureau (CFPB) has started crack on payday lenders.
“I am pleased that the court has affirmed our ability to protect borrowers from unfair and abusive payment practices in payday lending and other markets covered by the rule,” Dave Uejio, acting director of the CFPB, said in September after one of the CFPB’s payday lending rules was violated Offices had been confirmed court.
To help banks get into the smaller credit space, the Federal Deposit Insurance Corp. (FDIC) new guidance released last year for banks to offer small loans. In addition, the CFPB has actively encouraged banks to offer small loans, and even published a template to assist them in complying with the Bureau’s banking regulations.
With today’s technology and AI, lenders can get a better picture of consumer behavior and their creditworthiness, which could allow them to expand access to credit and lower interest rates as they take fewer risks.
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