Chris Pollara is chief executive of a successful digital marketing agency. He’s got a college degree and a steady income, and he pays his bills on time.
But when the 32-year-old needed a loan recently to renovate the kitchen of a house he bought in Hingham, he discovered credit was frustratingly tight.
“Banks were like, ‘Well, you just took out a mortgage,’ ” said Pollara, who cofounded Boston-based Convertiv in 2009. “It’s like, ‘No kidding! Who doesn’t need a mortgage to buy a house?’ ”
So Pollara turned to Earnest, a new small-scale lending company with an unconventional approach to risk assessment. He borrowed $10,000 last month and has the renovation project underway, with completion expected in weeks.
Rather than focus only on standard measures, such as borrowers’ credit scores and existing debt, Earnest also considers spending and saving habits and income potential, based on such factors as where borrowers went to college and what degrees they earned. The company has been using Boston as a test market and will have its official launch on Monday.
Earnest is even willing to issue loans for reasons that might raise eyebrows at other lenders, such as vacations and gifts. One borrower who participated in the company’s test, along with Pollara, is planning to propose to his girlfriend and used the money to buy an engagement ring. That borrower declined to be quoted by name, as he did not want to spoil the surprise.
Earnest is headquartered in San Francisco but is opening in Massachusetts first because of the high concentration of young professionals in Greater Boston, said chief executive Louis Beryl, a Harvard Business School graduate. Loans will range from $1,000 to $10,000 and are for one-year terms, at 6 percent interest.
‘Even if you’re incredibly low-risk as you come out of college or grad school and enter the workforce, you just by definition have a short credit history because of your age.’
That’s a much lower rate than what is typically available for personal loans from other lenders. Bankrate.com cites an average rate for a personal loan in Massachusetts of 11.82 percent.
Using a credit card, a typical option for many borrowers, can be even more expensive. The current average interest on variable-rate credit cards is15 percent, according to Bankrate, and 13 percent for fixed-rate cards.
Beryl believes the loans will be a hit with people fresh out of school, who may be at the beginning of promising careers and are perfectly capable of repayment, but are likely to be turned down elsewhere or saddled with high interest rates because they don’t have long histories of making good on their debts.
“Even if you’re incredibly low-risk as you come out of college or grad school and enter the workforce, you just by definition have a short credit history because of your age,” he said. “All of those people are paying more interest than they need to be, or they can’t get loans. We’re talking about people who are graduating with great jobs and are financially responsible.”
Earnest’s loans are not only for recent grads, Beryl noted. Anyone who encounters a spike in expenses because of a major event — a move, wedding, or car accident — could be a candidate.
The online application takes about 10 minutes, and prospective borrowers can expect a response in two or three business days.
They also can expect to share more personal information than is typical for small loans, such as bank and savings account statements. Earnest’s deep dive into an applicant’s financials could be a turnoff, Beryl acknowledged, but he said the company’s thoroughness allows it to lend money to people who might not pass a cursory review.
Most customers, Beryl predicted, would be willing to make the trade-off.
Earnest is backed by Andreessen Horowitz, the California venture capital firm where Beryl was a partner before leaving to launch his startup, along with Atlas Venture and First Round Capital. He declined to disclose the amount of funding Earnest has raised.
The company is not a slam-dunk, said Atlas partner Jeff Fagnan, but investors see tremendous upside.
“We looked at it as, this might not work, but if it does it’s transformative to banking, credit scoring, and loan origination,” he said. “It transforms a big market that is pretty ripe for disruption. We thought it was as ambitions a play as you can take, and we think Louis and his team have a lot of the right elements.”