How lenders approve loans can seem like an opaque process that sometimes makes little sense to consumers. However, that’s actually not the case. Although every lender is different, when it comes to loan eligibility, most will go through roughly the same steps in order to determine whether your application should be successful. If you’re planning to make an application for a loan in the near future then it’s important to understand what’s likely to be involved in a loan eligibility check.
What do underwriters look for in loan approval?
This is an important question because underwriters influence the criteria for how lenders approve loan applications. Essentially, underwriters will be looking for someone who has the ability to make repayments on the loan and who is not an excessive credit risk. It will also be key to ensure that the loan being applied for is affordable for the borrower – i.e. that repayments can still be made alongside other monthly obligations, such as rent and bills.
What are the requirements for the loan approval?
It’s worth noting that this will be different for every lender, depending on the nature of the loan you’re applying for and the type of lender you’re applying with. Many lenders will ask these key questions when it comes to loan eligibility:
What kind of credit history does the borrower have? Lenders will look at the way that you have handled credit in the past i.e. whether you have made payments on time and if you have any history with defaults or County Court Judgments (CCJs). If you have a bad credit score it’s not necessarily the end of the world, as there are many lenders who are happy to offer loans to anyone with less than perfect credit.
How much debt does the borrower already have? This will affect your credit score but is also something that lenders tend to look into in terms of whether the loan will be affordable for you. If you already have a lot of debt a lender may conclude that more debt isn’t going to be feasible in terms of you being able to make all the repayments.
What are the personal circumstances of the borrower? Lenders will look at a range of different factors here, for example how much you earn and whether you are a tenant or homeowner. Depending on the type of lender you’re making an application to you may need to provide documents, such as proof of earnings.
What type of loan is the borrower applying for? Different loans have different requirements when it comes to borrower status etc. For example, payday loans are often for smaller amounts and are repaid quickly so it’s easier to obtain payday loans if your credit score is low. A secured loan – such as a homeowner loan – will have a very different set of requirements, for example you will need an asset on which the loan can be secured, such as a car or a house.
Does the borrower have any support? For example, if you have a low income and/or your credit score isn’t great but you have a friend or family member who is willing to stand as a guarantor then this could meet the basic requirements for loan approval.
Understanding how lenders approve loans – and getting approved
Loan eligibility involves a wide range of different factors. If you’re looking to ensure that you get approved during a loan eligibility check then there are a number of ways that you can do it.
- Don’t make multiple applications at once. If you’re making lots of loan applications this will negatively influence your credit score and won’t help with loan eligibility.
- Make sure you find the right kind of loan for you. Part of the process of being approved for a loan is simply finding the right one. For example, if you want to borrow over a long period of time and make low monthly repayments, an unsecured personal loan will be a much better option than a payday loan.
- Apply to the right lender. Many high street banks and building societies simply won’t consider borrowers who don’t have a perfect credit score or who already have debt. However, the lending industry today is very diverse and there are many online lenders and smaller lenders who are willing to work with a broader range of borrowers.
- Work on your finances before you borrow. If you don’t urgently need finance you can often increase your chances of being eligible for a loan by waiting and making some subtle changes to your current financial circumstances. For example, pay off some existing debt and make sure your credit file doesn’t contain any mistakes that could be affecting your credit score.
It’s essential to understand how lenders approve loans if you want to improve your chances of being eligible for the finance that you need.