Upstart Refocuses on Personal Loans as Consumer Stress Rises

Key Points

• Upstart is refocusing on personal loans, which CEO Paul Gu called the company’s most differentiated and highest-margin product. Core personal-loan growth accelerated sharply in the second quarter as the company redirected resources toward marketing, approvals, conversion and underwriting.
• Consumer credit conditions have worsened: Upstart’s Macro Index reached approximately 1.5, indicating borrowers were about 50% more likely to default than before the pandemic. The company is nevertheless working to bring its auto and HELOC products to break-even before year-end.
• Upstart’s planned national bank, expected to launch in early 2027, remains its largest 2026 project and could reduce operational complexity and lower funding costs. Management also expects operating-expense growth to slow to low single-digit quarterly growth in the second half of the year.

Upstart NASDAQ: UPST CEO Paul Gu said the company is concentrating its efforts on expanding its core personal loan business, which he described as the company’s most differentiated and highest-margin product. Gu said the segment’s growth accelerated in the second quarter, with core personal loan growth reaching roughly 3.5 times the growth recorded across the prior three quarters combined.

Gu, who previously served as Upstart’s chief technology officer, said the company has shifted internal priorities across marketing, application conversion, approvals, rate acceptance and verification to emphasize personal loans. He said the company had previously directed more resources toward other initiatives but has since refocused teams on increasing personal loan volume.

“Core personal loans is what we’re really, really good at doing,” Gu said, citing the company’s ability to separate credit risk and identify borrowers it believes can be uniquely underwritten in the market.

Product Priorities and Secured Lending

While Upstart continues to pursue newer products, Gu said the company has narrowed its list of priorities. He said Upstart paused its auto refinance product because it did not have the same potential, growth profile or momentum as other initiatives.

Gu said the remaining product bets have large addressable markets, are adjacent to areas in which Upstart already has expertise, and have sufficient momentum to justify additional investment. The company’s secured lending products include auto lending and home equity lines of credit, or HELOCs.

For those newer secured products, Gu said Upstart first focused on validating demand and building third-party capital-provider relationships before turning to unit economics. He said the company believes it has demonstrated demand from auto dealerships and from HELOC borrowers seeking its rates and process.

Upstart is now working to move the secured products from negative contribution margins to profitability. Gu said the company expects those products to reach break-even before the end of the year, after which it plans to focus more heavily on scaling them. He declined to project their long-term margins but said there was no theoretical reason they could not eventually approach the economics of the core personal loan business.

Consumer Stress Remains Elevated

Gu discussed the company’s Upstart Macro Index, or UMI, which measures the likelihood that consumers will default on unsecured consumer credit relative to pre-COVID levels. A reading of 1.0 corresponds to conditions in 2018, 2019 and early 2020, he said.

With the UMI at approximately 1.5 as of Sept. 3, Gu said a consumer with the same borrower and loan characteristics was about 50% more likely to default than before the pandemic. He said the index had risen by 12 points since the spring.

Gu attributed the pressure on borrowers in part to inflation exceeding wage growth over roughly the prior six months. He also cited credit card utilization and delinquency data as evidence that American borrowers are under more stress than they were six months earlier.

Still, Gu said investors should not place too much emphasis on short-term changes in the macro index. He said Upstart does not provide near-term results guidance partly because it wants to respond quickly to changing credit conditions. Over a multiyear period, he said, durable improvements in marketing, automation, underwriting and risk separation should matter more than monthly macroeconomic movements.

Gu said that despite higher interest rates and greater consumer stress than in 2021, Upstart is generating more contribution profit than it did during that more favorable macroeconomic period. He attributed that result to several years of technology improvements.

Technology, Capital and Bank Plans

Gu said Upstart has continued to improve its lending models since its founding in 2012 and has not exhausted potential avenues for advancement. He said the company has more than 140 million training data points and expects additional data, computing improvements and research into learning algorithms to support increasingly sophisticated models over time.

He described the company as a relatively advanced adopter of artificial intelligence tools internally, saying the technology has contributed to more code being written and faster ticket resolution. Gu said he expects those gains to translate over time into greater revenue growth per employee, though he noted it can be difficult to attribute results precisely.

On funding, Gu said Upstart has retained all of its capital partners in recent years, with agreements being renewed for longer terms, larger amounts and generally better terms. He said the company has not seen evidence that competitors’ funding or marketing activity has materially hurt its ability to originate loans.

Gu also said the company’s planned national bank remains its largest single project in 2026. He said the bank has conditional approval and is expected to launch in early 2027. The investment will be a cost center in 2026, but Gu said it should provide operational benefits by reducing complexity associated with working with nearly 100 originating partners that operate under varying regulatory requirements.

He said the bank does not represent a change in Upstart’s primarily third-party funding strategy. However, it could allow the company to fund some of the approximately $1 billion of loans on its balance sheet more efficiently through lower-cost deposit funding and leverage.

Gu said operating-expense growth is expected to slow to low single-digit quarter-over-quarter growth in the second half of the year. He said Upstart expects to gain operating leverage as secured products improve, internal AI investments mature and the bank project moves toward its anticipated 2027 launch.

About Upstart (NASDAQ:UPST)

Upstart Holdings, Inc operates a cloud-based lending marketplace that leverages artificial intelligence and machine learning to assess borrower creditworthiness. The company partners with banks and credit unions, providing its proprietary AI models and underwriting platform to facilitate consumer credit products. By focusing on non‐traditional data points—such as education, employment history and other real‐time indicators—Upstart seeks to improve approval rates and lower loss rates compared with conventional credit scoring methods.

Upstart's core offering centers on unsecured personal loans, which borrowers can use for purposes such as debt consolidation, home improvements or major purchases.

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