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When you apply for a personal loan, a process called personal loan underwriting is used to help the lender assess if you are creditworthy and whether the loan should be approved. A lender’s employee examines various criteria to make the determination. Knowing more about the underwriting loan meaning in advance can aid you in presenting your best financial profile.
Learn more about the personal loan underwriting experience here.
Key Points
• Taking a few hours to a few days, personal loan underwriting allows lenders to assess a borrower’s creditworthiness by evaluating their financial profile.
• This process allows lenders to evaluate the risk of default, which helps protect their own interests while ensuring borrowers do not take on unmanageable debt.
• Underwriters typically review an applicant’s annual income, assets and debts, stability of employment, and credit history.
• The personal loan underwriting process often takes one to three days, though many lenders use automated modeling to make decisions in as little as a few hours.
• To facilitate a smooth process, applicants can organize all required documentation, maintain or positively impact their credit score, and avoid opening new credit accounts while their file is under review.
What Is Loan Underwriting?
Loan underwriting, whether for a personal loan or a mortgage, is the method that lenders use to determine whether a prospective borrower is creditworthy enough to be allowed to borrow money. Typically, this involves a deep dive into the applicant’s financial situation, including a review of their credit history (which shows how well they have repaid debts in the past), their income, and their assets and debts. This is often done by a loan officer, not to be confused with a loan processor, who will later verify the details of the application.
Underwriting may also consider what the borrower might use as collateral if the loan is going to be secured vs. unsecured.
Why Is Underwriting Necessary?
Underwriting is a necessary process that allows a lender to evaluate whether an applicant is likely to repay the loan or if there’s an elevated risk they’ll default. This process is vital for both parties involved: By doing a deep dive into the applicant’s ability to repay debt, the lender not only protects their own interest but also helps the would-be borrower avoid unmanageable debt and possible default.
For these reasons, loan underwriting is a very valuable step in the borrowing process.
The Personal Loan Underwriting Process
When an applicant is seeking a personal loan, the underwriting process is similar to that for other loans: The lender wants to feel assured that the borrower will repay the debt. However, the process does vary somewhat among lenders and according to what type of loan is sought.
For personal loans, which are usually but not always unsecured (meaning collateral is not part of the loan), key factors include a borrower’s financial profile and credit history. These can help reveal the likelihood that a borrower can repay the loan.
A quick overview of personal loans: They often range from $5,000 to $100,000 and have a term of two to seven years, though loans with one- and 10-year terms may also be available. As noted above, personal loans are typically unsecured, meaning borrowers do not need to provide collateral.
Most of these loans have a fixed vs. variable interest rate, so payments stay constant and predictable over the life of the loan. Also worth highlighting is the fact that personal loan uses are wide-ranging and flexible. Commonly, they can help consolidate credit card debt, pay for a vacation, or make a major purchase, such as furniture or kitchen appliances.
What Underwriters Look At
When reviewing qualifications for approval of a personal loan, underwriters typically look at the following criteria, often with the assistance of tech-powered modeling:
• How likely is it that the applicant will repay the personal loan based on their annual income and current debt load. (This is why your debt-to-income ratio matters and why it’s good to pay attention to it.)
• How stable is their employment history (getting a personal loan when self-employed is possible, but it may have different requirements)
• How strong is the applicant’s credit history, which reflects how well they have paid past debts
• If collateral is being used, how much it’s worth and whether it will hold its value
Recommended: What Credit Score Do You Need for a Personal Loan?
Steps of the Underwriting Process
Here are the five steps usually taken during the underwriting process, including collecting information and evaluation of the applicant’s financial standing.
1. The prospective borrower gathers the required documents and submits them along with their application.
2. The underwriter reviews the application package, requesting additional information if needed. Computer modeling may play a role in this step.
3. The underwriter makes a decision whether to approve the loan application.
4. If the loan is approved, paperwork is signed and processed, and the loan funds are released to the borrower.
5. After the loan closes, finalized documents are forwarded to the borrower with information on the loan and the repayment schedule.
How Long Does Underwriting Take?
The time that underwriting takes can vary, but for personal loans, it may only take one to three business days. In some cases, when the process is automated, lenders may say that it takes only a few hours.
Keep in mind that even if you received a marketing communication that says you are prequalified or preapproved, your application will still go through underwriting, and approval is not guaranteed.
Tips for a Smooth Underwriting Experience
If you are considering applying for a personal loan, here are some tips for a smooth application and underwriting process:
• Gather your documents. It can save you considerable time and stress if you collect paperwork in advance. You will likely need such things as a couple of years’ worth of W-2’s and tax returns, a couple of months’ worth of paystubs, and statements of bank accounts, retirement accounts, investments, and other assets.
• Consider optimizing your credit history. Review your credit reports and scan for any errors; take steps to remedy any that are found. It is also wise, if possible, to pay down high-interest debt (such as credit card debt). “If you’re looking to pay off your debt faster, it’s a good idea to take a look at your spending and income, find ways to reduce your nonessential spending, and then funnel any money you free up toward your debt repayment plan,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. Applicants with a more positive credit history may qualify for more favorable personal loan interest rates, too.
• Try to avoid opening any new lines of credit or applying for additional loans while your file is with underwriting. This can negatively impact your credit score and raise concerns that you are seeking access to more funding than you can repay on time.
• Lean into the process. Be prepared to provide additional information that is requested during loan underwriting at your earliest convenience to keep the process moving. Provide all documents needed to satisfy personal loan requirements versus trying to filter your profile for appearances’ sake.
Recommended: What Is a Good Debt-to-Income Ratio for a Personal Loan?
The Takeaway
The underwriting process for a personal loan is a thorough review of your financial profile to ensure that you can repay the loan in a timely manner and do not take on more debt than you can handle. The process typically takes a few days; requires an exploration of your earnings, assets, debt, and credit history; and can lead to approval of a personal loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What does a personal loan underwriter do?
A personal loan underwriter’s job is to evaluate the risk of lending money to an applicant. To accomplish this, a loan underwriter will review the application and the prospective borrower’s income, assets, debts, and credit history to determine if they are likely to repay the loan in a timely manner. If so, the loan will be approved. Computer modeling is typically part of the process. In addition, the personal loan underwriter also makes sure that the loan conforms to certain guidelines.
Can you be denied a personal loan after prequalification?
A would-be borrower can be denied a personal loan after prequalification (and even after preapproval). Regardless of being prequalified, you must go through the underwriting loan process and can be denied if the process reveals that you may not be able to repay the loan in a timely manner.
Does underwriting affect your credit score?
A component of the underwriting loan process can impact your credit score. The hard credit inquiry, which is typically part of the evaluation of an applicant’s creditworthiness, can temporarily lower your credit score by a few points, usually no more than 10.
What are common reasons a personal loan gets denied during underwriting?
Common reasons for a personal loan to be denied during underwriting may include a low credit score, a high debt-to-income ratio, income that doesn’t meet the requirements (income that is low or erratic), and/or errors on the application or information that is missing from it.
Is personal loan underwriting automated or manual?
The personal loan underwriting process is mostly automated today. Many aspects of the process, such as credit checks and income level verification, can be done via technology. The use of algorithmic software allows personal loan decisions to be made very swiftly; approval can occur in a matter of hours or few days.
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