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ZestFinance targets loans at the cream of subprime borrowers

SAN FRANCISCO, July 15 (Reuters) - Venture-backed lender ZestFinance is raising its standards: its latest product targets subprime borrowers.

As one of the earlier entrants in the growing group of businesses offering loans to consumers with dings on their financial records, ZestFinance has spent years helping consumers with terrible, or no, credit. Now, it is branching out to consumers with merely bad credit, the group known as "near prime."

With its new loan service, Basix, ZestFinance is catering to customers whose credit score might range from 600 to 680, just below the level that typically allows them to qualify for bank loans.

"Our motivation was middle America, where a small problem, a health issue or bad divorce, could push a perfectly hard-working person out of the core banking system," ZestFinance chief executive Douglas Merrill told Reuters by email.

The three-year loans of $3,000 to $5,000 carry fixed rates of interest ranging from 26 percent to 36 percent. While the rates are far greater than a traditional loan, the alternative for many of those taking them are payday lenders, whose interest rates can run 400 percent or more.

ZestFinance's existing business makes loans, or licenses software to those who want to make them, to much riskier customers, those whose credit scores run below 500.

It crunches through myriad data points, rather than traditional credit scores, to figure out which people in that cohort can repay the loan.

Merrill, formerly chief technology officer of Google, fine tunes the algorithms as growing numbers of customers provide more insight into characteristics that lend themselves to creditworthiness, such as how long potential customers have kept the same mobile phone number.

Los Angeles-based ZestFinance joins many other companies catering to near-prime customers, including Fort Worth, Texas-based Elevate Credit and San Francisco-based LendUp.

ZestFinance's backers include Lightspeed Venture Partners, Matrix Partners, and PayPal co-founder Peter Thiel.

(Reporting by Sarah McBride; Editing by Clarence Fernandez)