What if loans were based off of merit – your future salary, your education level, your timeliness of paying bills – rather than simply your credit history? San Francisco-based Earnest hopes to do just that, starting with the launch of its merit-based loan program for fiscally responsible graduate students and young professionals throughout Massachusetts. What’s more, the startup has its own fresh round of financing, led by Boston-based VC firm Atlas Venture, to help them put their plans into action.
Earnest claims its underwriting technology looks at the individual borrower holistically, assessing applicants on not only credit history, but also current and future potential. Qualified applicants receive one year loans of $1,000 to $10,000 at a flat six percent interest, with no hidden fees.
“The current system essentially only looks at your credit score, which is a very blunt instrument. It doesn't take into account your current salary or your spending or saving habits,” Earnest CEO and co-founder Louis Beryl told BostInno.”We can use our software to verify and pull people’s credit card, savings and income info to underwrite them more thoroughly, very quickly, cheaply and easily.”
The idea for Earnest first came to Beryl when he and his wife were preparing to attend graduate school themselves. Beryl hails from a
“normal” family: “I was on financial aid in undergrad and worked part-time on the side for my spending money,” admitted the entrepreneur. Upon graduating, he picked up a well-paying job at Morgan Stanley, and made it a point to be fiscally responsible. Fast forward a few years to when Beryl was accepted into a dual degree program at Harvard Business School and Harvard Kennedy School of Government and his wife was preparing to get her PhD. Neither expected to work during graduate school, and the newlyweds couldn’t pay for their tuition in full. “But as I was applying to loans, I was getting categorically denied,” said Beryl, adding that his mom had to sign off on the loans at a high interest rate. Explained the entrepreneur:
I felt in my gut that I was a lower risk. I always paid my bills on time and payed my credit reports. I had a good income. I was headed to great schools. I was going to have a good income in the future … I thought, ‘Why am I being charged so much when I feel like I’m such a low risk individual? I constantly felt like the credit system wasn’t pricing me accurately.
Earnest currently has six people in its beta and made $50,000 in loans thus far. According to Beryl, about half of the recipients are in graduate school, while the other half have jobs but are moving to a new city and have to front the costs of the transition. The loans can also be put towards major life events, like a kitchen remodeling, a downpayment on a car or apartment, a wedding or honeymoon.
Earnest closed an undisclosed round of funding in September 2013, led by local firm Atlas Venture, with participation from Andreessen Horowitz and First Round Capital.
“By eschewing the high cost infrastructure of the past and offering a more efficient system that allows for lower interest rates, Earnest is changing the consumer lending landscape,” said Atlas Venture partner Jeff Fagnan in the release. “Through this beta program, we will be able to see firsthand how a focus on technology, mixed with financial prudence and trust, can generate real change in an old market.”
With a high density of talented young professionals and students, Boston makes a strong first market for Earnest. The company hopes that its transparent approach and willingness to work with individuals’ needs will entice a “few hundred” people to apply.
“We believe that the purpose of a bank is to help people realize their hopes and dreams, and we want to be there for those people,” said Beryl.
For now, though, Earnest isn’t considering itself a bank, and is taking it slow. “We want to build relationships with clients that last their whole lives,” shared the CEO. The company currently has 11 people working full-time in its Silicon Valley office.
