Is Upstart in Trouble After the Fed's Monster Rate Hike?

The rapidly rising interest rate environment proved to be a huge headwind for the artificial intelligence lender Upstart (NASDAQ: UPST) in the first quarter of 2022. As the Federal Reserve began raising its benchmark overnight lending rate, the federal funds rate, the market -- sensing a newly hawkish Fed -- quickly drove up other short-term rates. This put pressure on loan demand and Upstart's overall business model. In the second quarter of the year, the Fed has continued to be aggressive in its efforts to combat inflation, raising the federal funds rate by 50 basis points (0.50%) in May and then 75 basis points in June. Considering that Upstart struggled in Q1 due to rising rates, is the company once again in trouble? Let's take a look.

Upstart runs a technology business, and claims its proprietary loan underwriting models can better assess the credit quality of borrowers for personal and auto loans. In doing so, Upstart hopes to not only produce lower default rates for financial institutions, but also grant borrowers lower on the credit spectrum access to traditional lending products at lower interest rates.

The company is not a bank and it generally doesn't hold any loans on its balance sheet. Instead, its tech is used by banks and credit unions that fund the loans with their own deposits and then hold them on their balance sheets. Upstart can also sell the loans to institutional investors and whole-loan buyers, which is what it does with the bulk of its originations.

Source Fool.com