Personal loan underwriting is the process lenders use to assess your creditworthiness and decide if they’re confident enough to approve you for a loan. When you apply for a personal loan, an underwriter—a bank or insurance company employee who assesses loan applicants—will evaluate your financial health. Knowing what financial factors banks look at during this process, how the process works, and what you can do to prepare will help you have the best experience. 

Keep reading to get a better understanding of what underwriting means, why the loan underwriting process is important, what exactly goes into personal loan underwriting, and 5 tips for a smooth loan experience.

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Why is underwriting necessary?

Underwriting helps a lender determine how risky it would be to lend money to a borrower. Understanding these risks reduces defaults or non-payments from the borrower during their loan term—both of which could affect the borrower’s credit health.

The underwriting process also creates a fair and stable market, allowing banks to offer more competitive rates. Overall, this process protects both you and the lender. 

What is the personal loan underwriting process?

The personal loan underwriting process exists so banks can be confident that you’ll pay back your loan. The bank, or underwriter, will look at multiple factors in your financial health to determine the risk of lending to you.

The basic definition of underwriting is similar from one type of loan to the next. But the specific underwriting process can differ, and each lender has different ways of looking at the data. For example, the process for underwriting a personal loan is not the same as the underwriting process for a mortgage, which is more complex.

For a personal loan, underwriting includes examining the credit history of a borrower as well as weighing their creditworthiness (that is, the risk of nonpayment).

Most lenders focus on a few key factors during the underwriting process:

  • The borrower’s ability to repay the loan, annual income and current debts
  • The borrower’s collateral (if applicable to the loan type)
  • The borrower’s credit history and how well they’ve paid past debts
  • The borrower’s employment tenure/history and housing stability

Underwriters may use a strict set of criteria to reach an approval decision. That is, if a borrower doesn’t meet all the lender’s rules, the application may be rejected. Lenders often use a computer model to help analyze the risks of lending money to a particular borrower.

Steps of personal loan underwriting

  1. Borrower gathers and submits application and required documents
  2. The application is reviewed by the underwriter
  3. A decision is made by the underwriter
  4.  If approved, documents are signed and funds are dispersed
  5. Post-closing documents are sent with additional information on your loan

How long does the personal loan underwriting process typically take?

In general, the process may only take a few days. In some cases, where the process is automated, it could only take a few hours.

It’s important to note that all loan applications go through underwriting—even if you receive an offer in your mail or email saying you’re preapproved or prequalified. These marketing offers are a preselection based on a limited set of data about your financial picture. 

Possible Outcomes

There are three possible outcomes to underwriting:

  • The underwriter approves the loan after assessing borrower’s financial health and determining they are not a risk
  • The underwriter asks for more information due to new details in your financial health that need further explanation
  • The underwriter denies the application because the borrower doesn’t meet the lending requirements

5 tips for a smooth underwriting experience

The underwriting process can sometimes be long and involved. But you may be able to make it go more smoothly. Here are five tips for a better underwriting experience.

1. Boost your creditworthiness

People with higher credit scores are more likely to be approved for a loan. They may also get lower interest rates. If you need to improve your credit score, paying down as much of your higher-interest debt as possible can help. A personal loan for debt consolidation could help you pay off debt faster and help you save money on interest.

2. Get your documents in order

You may speed up the underwriting process by gathering these documents and having them readily available:

  • Employment information and W-2s from the past two years
  • Pay stubs from two or three months before the date you apply
  • Income tax returns from the previous two or three years
  • Statements from checking, savings, and money market accounts
  • Information on certificates of deposit, retirement plans, and other investments

3. Don’t apply for new credit or loans during underwriting

Big changes to your finances can cause problems during the underwriting process. To help avoid snags, don’t apply for new credit cards, loans, or lines of credit until after underwriting for your current loan application is complete. The same goes for making large purchases.

4. Respond quickly

Your lender may ask for more information no matter how well you have prepared. When you get these requests during the underwriting process, gather everything you need as soon as you can. The process won’t move forward without these additional items.

5. Be honest

Be completely transparent about your income, debts, and any credit issues you may have had in the past. That way you can explain any questionable entries that might show up on your credit report.

The bottom line

You don’t need to understand all the details of the underwriting process. But knowing how some of the decisions are made when you apply for a loan might help. Now that you know the basics, you can move forward with your loan application one step at a time.

Thinking abot applying for a personal loan? Our personal loan calculator makes it easy to estimate monthly payments based on loan amount, loan term, and credit score.

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