While his new employer, Morgan Stanley, promised to reimburse his relocation expenses, he needed $8,000 to front the costs of the move-not the sort of thing a 22-year-old with little credit history could get a bank loan to cover.
Despite its down-home name, Earnest is one of three startups, all backed by sophisticated investors, that aim to use fancy algorithms and novel information sources to make small loans to young folks with thin conventional credit files-too thin, that is, to borrow at reasonable rates, if at all, from the banks.
Earnest goes beyond the conventional credit reports banks get from Equifax, Experian and TransUnion to crunch big data-80,000 to 100,000 data points per applicant, collected in large part by linking directly to an applicant’s bank and credit card accounts and downloading a full history, including deposits, withdrawals, balances and payments.
A traditional credit score considers whether an applicant paid his credit card bills, mortgage and other bank loans on time, but it doesn’t always capture prompt payment of rent and doesn’t consider earnings or education.
In exchange for all this data, which Millennials seem to have fewer qualms than their elders about sharing, Earnest offers people with short credit histories unsecured loans of $2,000 to $30,000 at rates of 4.25% to 9.25%, for one to three years, with no origination fee.
Upstart lends to the widest range, and its rates on three-year loans of up to $25,000 vary accordingly, starting at a 5.7% APR but topping out at a hefty 30% APR, including an origination fee of up to 6%. Its algorithm uses both credit bureau information and factors like the college a prospective borrower attended, GPA and SAT scores, and work history to identify folks it predicts are better risks than their FICO scores would suggest.
“You have to keep in mind, have really small portfolios. They’re very new. Sometimes you don’t peak on your defaults until month 12 to 24. It’s really the second-year loans where you’ll historically run into these things,” warns Kenneth Lin, founder and CEO of Credit Karma.