Traditional Lenders vs. Earnest: How We Broke the Mold

To look at the history of borrowing in America — for cars, houses, and more — is not only a lesson in economics but also a lesson in psychology. “Debt” used to be a stigmatized four-letter word, says Cornell professor Louis Hyman, author of Borrow: The American Way of Debt.

That’s changing in today’s world. Finding a responsible way to use credit to pay for education, for example, is the new normal: 71% of new college graduates in 2015 had student loans.

But even if the reasons or needs to borrow have evolved over time, that evolution has not been matched by the traditional lending industry. Little has been done to transform the actual mechanics of borrowing money — and traditional lenders are using pricing and underwriting models that are decades old.

Earnest is changing that.

We are using the newest technology to fundamentally change how borrowing works in order to provide faster access to credit and lower cost loans for customers.

This is how Earnest is different:

1. You get a custom loan by refinancing with our Precision Pricing feature. That means you get the interest rate you should be paying — rather than a general five-, 10-, 15- or 20-year term where you could likely be overpaying in interest.

2. Your application undergoes fast and holistic underwriting that rewards financial responsibility by using up to 100,000 data points in your financial profile.

3. You have radical flexibility with repaying your loan — you can skip a payment, make two in a month, customize your payment to your budget, and more. We don’t have any penalties or fees to do that.

We believe this is the future of borrowing money. Here’s why.

Earnest’s Precision Pricing

First, let’s look at how Earnest handles a loan term compared to other traditional lenders.

Your loan term, or lifespan of the loan, is one component that goes into the annual percentage rate you will pay. The shorter your loan, the lower your APR should be; the longer your loan term, the higher it will be. Generally, longer terms are assumed to be riskier, and thus warrant a higher rate.

Diagram showing that traditionally, borrowers are offered only a few % APR rates, which are often bucketed into 5 year buckets.

With student loan lending and refinancing, loan terms have traditionally been often offered in five-year increments up to 20 years. One reason these five-year segments exist is that it is easy and cheap for the lender to programmatically lump borrowers in one of four generic terms, and then offer a rate that’s linked to that term.

But for borrowers, these buckets don’t make a lot of sense. For example, if you want to pay more than the minimum due on your 10-year loan, you might be able to shave almost three years off your term and pay off the loan in seven years and three months.

If you did this at a traditional lender, you are still stuck paying the APR for a 10-year term even if you are doing the responsible thing by paying a little more each month. In a way, you’re getting penalized for paying off your loan early.

Diagram showing that Earnest offers precision pricing, which means we do not round up your % APR to the next 5-year bucket.

At Earnest, you tell us how much you want to pay each month with our Precision Pricing feature and then you pay an APR prorated to the length of time it takes to pay off your loan. That could save you thousands on reduced interest alone. You’re rewarded, not hurt, for doing the financially responsible thing.

Earnest Underwriting

The other component of the APR you will pay has to do with your financial profile. In the old way, lenders simply looked at your credit score and a quick financial snapshot to approve or reject your loan and offer you a rate.

This just doesn’t work well for younger borrowers — or even borrowers who have high debt (temporarily at least) at the beginning of a professional career path. This means their credit score may not be commensurate with their actual creditworthiness.

At Earnest, we look at your savings habits, your retirement accounts, your education history, and career path — and much more — to understand who you are. We use up to up to 100,000 data points to provide a holistic view of all your assets. This allows us to lend smarter and gives us an accurate insight into how financially responsible you truly are.

Earnest Flexibility

Traditional lending has long relied on a tried-and-true mechanism — fine print. Buried in statements and credit agreements, are disclosures about all kinds of hidden fees and penalties. Some of the common ones are:

  • Pre-payment Penalty
  • Origination Fee
  • Early Repayment Penalties
  • Overdraft Fees

These kinds of penalties and fees punish borrowers for doing a financially responsible thing. At Earnest, we think you should be rewarded for wanting to pay off your debt as quickly as makes sense for your budget (not forced to pay extra!).

That’s why with our Precision Pricing feature we start by asking you “How much can you budget to pay down your debt every month?” and then put you in a term that matches your budget — even if it’s not a number that fits into a five-year bucket. And from there, our technology adapts your loan to fit your life — not the other way around.

We factor in real life events so that you can fine-tune your repayment schedule to match the rhythm of your life and actual cash flow, not some accounting spreadsheet.

Earnest Is About You

When we were building our service for student loan refinancing, we threw everything we knew about traditional lending out the window. We spent months interviewing friends, family members, and total strangers about their frustrations with the student lending system and existing refinancing services

That research ultimately led to a much more powerful, much more flexible product that thousands of client love today – a product that emphasizes customization, control and an excellent client experience with in-house customer support for the life of your loan.

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