The evidence is compelling that Upstart Holdings' (UPST +4.88%) artificial intelligence-powered creditworthiness-scoring algorithm is superior to the more traditional evaluation protocols used by credit bureaus, including Equifax, TransUnion, and Experian. But the company remains largely relegated to the relatively small unsecured personal-loan segment of the lending business.
Upstart's trying to change that by expanding into new markets, and recent results suggest it is making progress. Automobile and mortgage loans are still only a small part of its total business, but that's quickly changing.
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Upstart is seeing strong growth on new fronts
The slow start in certain segments of the loan market is easy to understand. Lenders are slow to change, particularly when it comes to bigger-ticket items such as homes and cars.
These lenders are coming around, though. The company originated $263 million worth of auto loans in the first quarter of this year, quadrupling the year-ago figure. Mortgage loan originations grew almost as much, reaching $143 million for the same three months.
NASDAQ: UPST
Key Data Points
That's still only a fraction of the $3.0 billion in unsecured personal loans it facilitated in the same quarter, up 50% year over year. Give it time, though. The company has only scratched the surface of the car loan and mortgage markets.
Bigger and better opportunity elsewhere
Numbers from the Federal Reserve put things in perspective. As of the end of the first quarter, mortgage debt accounted for 70% of total household debt in the United States. The next-nearest categories of outstanding debt are tied for a distant second, but they're still the second-biggest. That's automobile loans and student loans, each at 9% of the market.
The unsecured personal loan market, conversely, is relatively small. Although TransUnion reports that its outstanding balances reached a record high of $276 billion by the end of last year, that's only a fraction of the $18.8 trillion that U.S. residents are currently nursing.
The Fed also says consumers are collectively paying on nearly $1.7 trillion worth of auto loans alone right now.
Already penetrating these markets pretty quickly
The size of these respective loan markets isn't quite the point. Although there are some loans on its books, the crux of Upstart's business remains helping lenders make decisions about potential borrowers -- fee-based help that's only needed a few million times per year by the United States' mortgage lenders, according to the Federal Housing Finance Agency's national mortgage database. Although the Consumer Financial Protection Bureau reports there are considerably more auto loans made in U.S. every year -- usually in the ballpark of 30 million -- these smaller loans result in smaller referral fees.
Still, Upstart originated only 12,202 car loans last quarter, and only 2,300 home loans, versus 410,854 unsecured personal loans. There's a ton of room ahead to continue penetrating these other lucrative markets. It's just going to require some shareholder patience.
That said, recognize that you may not have to wait nearly as long as you might expect for Upstart's ramped-up focus on car loans to start paying off in a big way. The pace of this business's growth is actually accelerating. So is its mortgage loan business, for that matter.
