What is Underwriting?

Underwriting is a process that loan companies or finance providers use in order to make a final decision as to whether to approve or decline an applicant for a loan

Underwriting may be carried out by an individual or a team (also known as ‘underwriters’) and the decision to approve or decline a loan application is based on a variety of checks: including statistical and behavioural customer analysis in order to determine a person’s eligibility. The process aims to seek a potential customer’s ‘creditworthiness’ seeing who is most likely to keep up with loan repayments if accepted.

How does the underwriting process work?

Underwriting involves both manual and automatic processes, to ensure the lender can receive a number of transactions daily and then filter the best applications.

The acceptance process of loans is also known as the ‘funnel’ due to the way it works: as the variety of checks gradually narrows down the number of applicants who have applied so that only a small number of applicants are left, and these are the ones who will be approved for a loan.

The ‘funnel’ procedure works in the following manner:

Application > Automatic checks > Manual checks > Decision > Funded

How long is the underwriting process?

In most cases, the underwriting process is fairly speedy: a loan typically stays in underwriting for a matter of hours, before a final decision to approve or decline an application is made. For things like applying for payday loans online, a number of checks are carried out instantly upon completing an application and you will be given an initial decision. Some loans must be funded immediately after that or spend a few hours in underwriting before being fully approved and funded, or declined.

However, there are some exceptions to this. For example, underwriting may take longer if the loan application has been made over a holiday period or a weekend. It may also take longer if more information is required on an applicant before making a final decision: such as needing further payslips or bank statements from the potential borrower.

Initial application for underwriting

When applying for a short term loan, applicants will be asked to fill in their details either online or on paper with this usually taking less than 10 minutes to complete. Based on this information, the lender can usually carry out the underwriting process, as the details requested usually determine if the applicant will meet the eligibility criteria. Details typically asked include:

• Age
• Monthly income
• Bank details
• Employment status
• On benefits
• Homeowner or tenant
• Whether you are a UK resident or not

Through asking these details from the applicant the lender can narrow down who is likely to be eligible. Every lender has its own set of criteria in terms of age (typically over 18 years old) and the applicant may also be required to be employed, or have a certain level of income each month.  This part of the underwriting process tends to be automatically processed by the lender. 

The next stage of the underwriting process

If applicants pass the initial stage, the loan provider will then carry out further checks which typically use credit technology and are fully automated. Some direct lenders claim that there are over 500 instant checks at this stage. At this point in the loan approval process, the following checks are carried out:

• Personal detail checks: an automatic check will be carried out to verify the applicant is the person who they say they are, using address-matching technology and checking bank details in order to gain confirmation of their identity.
• Credit checks: most lenders will work with a credit reference agency like Experian or CallCredit to determine an applicant’s credit score. The lender may set a certain credit score threshold that an applicant will need to meet in order to get to the next stage (for example, it must be over 650)

Manual underwriting

This is the part of the underwriting procedure that involves an underwriter to complete the task. They will usually call the applicant who has passed the other stages in order to confirm details, and may also request additional documents too, in order to verify eligibility for a loan.

The final stage of underwriting

The last stage of underwriting will involve a more senior staff member to professionally underwrite the application for a loan. At this point in the process, all information received so far is reviewed, and this will be assessed in order to determine whether the applicant will meet ‘affordability checks’. This determines whether the customer can afford to make repayments on the loan without getting into debt.

Provided the applicant meets the affordability checks, the loan provider will go ahead with providing the application and transfer the loan within 1 hour (or up to 24 hours depending on the loan).