What is personal loan underwriting?

Whenever you apply for a personal loan, lenders have a process for deciding if you qualify and, if so, what rate to offer you. This process is known as underwriting. 

Learn more about how underwriting works, the criteria that underwriters use to make lending decisions, and how to prepare your finances so you’re in the best possible position before you apply for a loan.

Loan underwriting is a process lenders use to determine if a prospective borrower meets the requirements to qualify for a loan, and if so, the loan’s terms. Underwriting helps the lender assess the creditworthiness of the applicant by conducting a thorough review of the person’s financial background, credit history, and the capacity to repay the loan. 

Underwriting takes place after an applicant submits a loan application. Based on what is uncovered through underwriting, the lender decides if it will approve the loan and the loan’s terms.

Lenders underwrite personal loans to assess borrowers’ credit health and their ability to repay the loan. Most personal loans are unsecured, which means they’re not backed by collateral, so financial companies are taking a risk when they lend large sums of money. 

Underwriting helps minimize that risk by ensuring that borrowers meet specific minimum qualifications for approval. For example, a borrower’s credit score is one factor used to assess risk and predict future repayment behavior. While a credit score alone does not determine loan eligibility, applicants with higher credit scores may have a better chance of qualifying for a loan when all other underwriting criteria are the same.

Loan underwriters look at several factors to get a holistic view of an applicant’s financial situation. Lenders usually have their own evaluation framework for how different criteria are weighed and factored into the lending decision. In general, underwriters try to determine the following: 

• Does this borrower’s track record indicate that they have been responsible with their credit lines? This question demonstrates why having strong credit is so important for being able to qualify for personal loans with competitive rates. 
• Does this borrower have enough stable income to be able to pay back the loan? Even if you have strong credit, you may be denied by a lender if you don’t have ample income or if you’re carrying too much other debt. 

Underwriters look at a variety of documents and data to answer these questions, including credit reports, banking and financial records, and income and employment records.

Personal loan underwriters will look at several criteria including your credit report and credit score to get a snapshot of your financial accounts and how you manage credit. Credit reports provide details on account behaviors and if you have had any past issues with creditors such as an account in default or a bankruptcy. The credit score reflects your most recent credit activity and account statuses. Depending on the credit score and other credit attributes, you may fall into different tiers of credit, which are poor, fair, good, or excellent.

If you’re borrowing money and need to pay it back, you’ll need to have income. Lenders want to make sure that you have steady, reliable income streams. You may be asked for pay stubs, bank statements, or tax returns to prove it.

DTI is the percentage of your gross monthly income used to pay monthly debt. For instance, if you earn $5,000 per month, but your monthly debt costs $2,500, you have a 50% DTI. A higher ratio may affect how a lender evaluates your repayment capacity.

Some personal loans may be secured with collateral, most commonly an asset like your car. If you fail to repay as agreed, the lender may have the right to repossess or otherwise seek recovery from the collateral, subject to the loan agreement and applicable law.

Not only do lenders want to see that you earn income, but they want to know that you’re employed or that you receive regular paychecks. This is why some underwriters ask to verify your employment. If you frequently change jobs or do gig work with unsteady income, it may require additional documentation or be more challenging to qualify for a personal loan.

The personal loan underwriting process works mostly behind the scenes after you submit your application. In most cases, you have already shared identification, documentation, or access to your financial accounts, as well as permitted the lender to perform a credit check.

Once the underwriters take over the process, they will begin reviewing your application piece by piece. They will do a deep dive into your credit history by looking at one (or more) of your credit reports. Underwriters may also verify the other information that you self-reported in your application, such as your income and other debts. Using this information, the lender will calculate your debt-to-income ratio. 

Depending on the lender’s specific underwriting process, you may be asked to submit additional documentation along the way, such as if the lender needs more supporting evidence of your income or employment.

Depending on the lender, the underwriting process may be conducted using automated systems, manual review by an underwriter, or a combination of both.

Underwriting for personal loans can take anywhere from a few minutes to several business days. 

A few lenders market themselves as offering fast approvals and likely use automated underwriting to offer that faster turnaround. It’s common to expect underwriting to take between one and three days. More complex applications requiring additional documentation may slow down the process.

After a personal loan goes through underwriting, there are generally three different outcomes. The loan is either fully approved, conditionally approved, or denied.

Here’s a closer look at each underwriting outcome and what it means for the borrower.

Getting through underwriting with an approval means that you met the lender’s qualifications. Once approved, the lender will generate a customized loan offer. The borrower will be able to review the offer and decide to move forward or not.

When an underwriting process determines that a borrower seems eligible for a personal loan but needs another item or two checked off to move forward, the lender may give the loan “conditional approval.” In other words, the loan is approved as long as specific conditions are met. For example, the borrower may need to provide additional income or asset verification, such as a W-2 or bank statement.

If underwriting determines that the borrower does not meet the minimum requirements for approval, the loan is denied. Lenders have a legal obligation to explain in person, in writing, or electronically the reasons why the borrower was denied the loan.

If you’re seeking a loan in the near future, you can take several steps to prepare for the underwriting process. The first is to check your credit report and credit score so you know where you stand. This also gives you a chance to correct errors or make improvements before you apply. 

Next, see if you can find out from the lender what types of documentation you will need to apply. Some examples could include a recent pay stub, a W-2, a tax return, or a bank statement. Once you have that list, you can begin to gather what you need for the application.

Understanding how personal loan underwriting works is important as you compare lenders and assess your ability to qualify for various products. The main thing to remember is that your credit history and income are key factors in how lenders evaluate you. They can also impact the type of offers you receive. Once you’re ready to apply, be prepared to share documentation and respond to requests for additional information promptly to help your loan application process go smoothly.