LendUp secures $ 14 million to provide affordable loans to people with poor credit

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LendUp, a startup offering an alternative to payday loans, has just raised $ 14 million in its first round of funding.

We first reported on LendUp in October 2012, when the San Francisco-based company launched its website and mobile app for California residents. The company has subsequently made tens of thousands of loans and millions of dollars to people with poor credit, and plans to expand its services across the country.

LendUp uses sophisticated algorithmic technology to identify the roughly 15% subset of people most likely to repay a loan. The company offers these customers up to $ 1,000 per year with interest rates as low as 29% APR, with no renewal fees or hidden fees.

The goal is to provide loans to people that banks typically turn down, so that they can avoid sinking into mountains of debt.

To determine loan eligibility, LendUp extracts publicly available data from a variety of sources, including social media sites like Facebook and LinkedIn. LendUp’s algorithm also takes into account applicants’ credit history and demographics.

The ideal borrower, according to CEO Sasha Orloff, is a single mother, who has to “wait around the corner behind bulletproof glass” to take out a short-term loan to do groceries for her family.

Another benefit for LendUp customers is that loan decisions are instantaneous and anyone can request them at any time of the day or night. “Even Zest, Think or BillFloat don’t do full algorithmic underwriting 100% of the time,” Orloff said in an interview.

Unlike corrupt payday loans, LendUp’s model is designed to be uplifting rather than dragging people down. When loans are paid off, applicants automatically move up the ranks. These loyal customers can unlock the benefits of a higher quality loan at a lower interest rate. LendUp now offers four levels or “rungs”: silver, gold, platinum and prime.

“We are the only lender that automatically grants our borrowers lower rates, over time, for demonstrating responsible behavior,” Orloff said.

The founders of LendUp see themselves as social entrepreneurs, which means they use business processes to generate social or environmental impact. Many of the startup’s early investors, including Kapor Capital and Bronze Investments, are focused on funding these types of “tech for good” companies. SoFi, an affordable lender for students, and LendDo, which helps people with low credit engage their social media to build credibility, are similar mission-driven startups in the fintech industry.

The founding team graduated from Y Combinator, an elite Silicon Valley accelerator. Orloff started the business with his half-brother Jacob Rosenberg and hired chief analyst Kai Stinchcombe (who later left to create another financial startup focused on underserved populations, True Link Financial).

The company plans to hire talent, expand into new markets, and invest in marketing to get the word out. In order to grow nationally, the team will also need to set aside funds to deal with possible regulatory challenges.

Orloff admits that it won’t be easy to overcome some of the pressure from illegal payday lenders and convince potential clients that their offer isn’t corrupt. Many of the current lenders do not follow US laws and are incorporated on Native American or overseas tribal grounds.

“They operate online loan websites that feature fine print, hidden fees, rates above applicable state laws, do not follow federal collections or marketing laws,” Orloff said. These lenders are also known to intimidate and threaten people for profit.

However, Orloff believes the LendUp model is already working, and we’ll see imitators all over the world soon.

“We have found a solution that does not cut the capital of the poor and helps them in the long run by offering them cheaper rates, helping them to create credit and integrating financial education into the experience”, a- he declared.

LendUp Series A was led by Google Ventures, with input from Data Collective and QED Investors. QED Managing Partner Nigel Morris is the founder of Capital One, which is one of the country’s most successful subprime consumer lenders.

Want to know more about LendUp? Here’s Orloff giving a TEDx talk on how the startup is disrupting payday lending and overcoming prejudice. “I’m proud to be a payday lender,” he says.

[youtube=http://www.youtube.com/watch?v=53amTLongCE&w=560&h=315]

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