What is Underwriting Process in the Personal Loan and its Rules?

July 20, 2023 • 2413 views

Once you apply for a loan, the request undergoes several verifications before getting approved. For lending institutions, handing out a loan involves a certain amount of risk. Hence, they take into account various factors like your credit score, repayment pattern, financial behaviour, and more to gauge the risk of lending the customer the requested loan amount. This process is known as loan underwriting. In this blog, we will discuss what loan underwriting means and the factors considered under it to finally issue the approval.

What is Loan Underwriting?

Loan underwriting is a step leading to the final stage of loan approval. In this step, the lender evaluates the applicant’s creditworthiness by scrutinising various factors. Some of the factors the lender will verify include customers’ income, debt, assets, etc to assess whether or not they meet the eligibility criteria.
The underwriting process minimises risk on the lender's end. Post-evaluation, the loans are granted to individuals or businesses who are most likely to repay the amount on time. Essentially, underwriting is for the lender to gauge the amount of risk they should take in exchange for a premium, which is the interest rate.
The Personal Loan underwriting process definition in particular, is the same as for other kinds of loans. However, the processes involved in it can differ slightly.

Different Types of Loan Underwriting

Underwriting professionals from financial institutions perform the process of underwriting efficiently to determine the risk involved with loaning to a certain applicant. 
There are different types of loan underwriting to protect different categories of lenders like, banks, applicants, and the market in financial contracts. These types include:
1. Automated Underwriting
Automated underwriting is a technology-driven process that uses pre-designed computer programs (also known as Automated Underwriting Engines) to evaluate your loan applications. 
The system automatically generates underwriting based on information such as income, collateral value, and debt entered the system. In turn, the automated system eliminates to a degree, the need for manual review.
Additionally, as it is an algorithm-driven, automated process, there is less scope for mistakes. While on one hand, the manual underwriting process takes days/weeks, automated underwriting can determine your eligibility for a personal loan in a matter of minutes. Many leading NBFCs have integrated this technology into their Personal Loan underwriting process.

2. Manual Underwriting
The Manual underwriting process may take longer than the automated procedure, but it takes various special cases into account, otherwise rejected by the latter. The human approach is useful for borrowers who have unique or complex financial situations, like:

  • Applicant has little to no credit history.
  • Applicants’ debt-to-income ratio is high.
  • Applicants has had financial difficulties in the past.

Rules of Loan Underwriting

There are certain underwriting rules/standards set by lending institutions to accurately determine one's creditworthiness. Here are some of the underwriting criteria that have to be met in order for the loan requests to be considered:

1. Credit Score
A credit score of 750 or above gives you a higher chance of loan approval. As you are perceived as a low-risk borrower, the lender may also give you a higher loan amount with more favourable terms.
2. Income
Individuals with higher incomes have more chances of getting loan approvals.
3. Debt and Liabilities
Having a DTI ratio of under 30% is ideal.
4. Collateral Value
Providing collateral allows you access to a higher loan amount at attractive interest rates as it is a low-risk loan on the lender's end.

ALSO READ :- What is Minimum CIBIL Score Required to Get A Personal Loan?

What are the Steps Involved in Loan Underwriting?

The process of loan underwriting depends on the type of loan. The below-mentioned steps are generally involved post-submission of your loan application:

  • Step 1: Reviewing of your income, the length of your employment, and if there are any gaps in it.
  • Step 2: Debts and liabilities are checked by the lender to access your credit score and report. 
  • Step 3: Collateral evaluation of secured loans is conducted to ensure its value is sufficient to secure the loan amount. 
  • Step 4: Satisfying Additional Conditions by providing additional documents and answering necessary questions.
  • Step 5: Risk Assessment once the above-mentioned information is gathered, evaluated and further assessed.  
  • Step 6: Finalising the Loan once it is approved.

Documents Required for Underwriting

Here’s the list of document so you must keep in handy for a hassle-free underwriting process: 

  • Bank statements
  • Income documentation
  • Credit score
  • Tax returns
  • Pay slips
  • Asset value
  • Photo ID
  • Loan setup
  • Employment history
  • Address proof
  • Debt-to-income ratio
  • Mortgage statement
  • Real estate tax verification
  • Underwriting notes

Having the above-mentioned documents gathered and ready to be presented, you can be assured of a rather smooth Personal Loan underwriting process.  

How long does it take to underwrite a loan?

It may take a few hours or up to a couple of weeks to underwrite a loan. Whether it is a Personal Loan or any other type of loan, the lender determines the applicant’s creditworthiness based on specific factors, before approving the loan request. 

Crucial Consideration during the Underwriting Process

Here are some of the factors which are considered during the Personal Loan underwriting process:
1. Credit Score - Your credit score is a crucial factor taken into account as part of the underwriting process. It influences your loan approval status and determines whether or not you will be able to repay your debt on time. The credit score signifies how prudent you have been in repaying your past loans.

 2. Income - In the underwriting process, both the gross (the amount a person earns after tax deductions) and net income are taken into account. Lenders usually set up an income bracket below which they do not lend since they believe that a borrower’s income cannot cover the monthly payments for a loan.  

3. Debt and Liabilities - Your current level of debt and liabilities is a reliable signifier of your loan repayment ability. Lending institutions consider the amount of debt you have, to verify whether you can afford to pay the loan back on time. Your Debt-to-Income Ratio (DTR) becomes an important factor here, which shows how much of your income is spent on paying off your debt.

4. Collateral Value - Secured loans, such as home loans and loan against property, require you to pledge an asset as collateral. However, if your pledged collateral is in poor condition, your loan application is prone to rejection. Your collateral value should either be equal to or more than the amount you are applying for. 

With Poonawalla Fincorp, you can apply for a Personal Loan and get access to competitive interest rates under agreeable terms and conditions. With a rather swift underwriting process, you can get fast loan approvals and other additional benefits like no use restrictions, flexible repayment tenure, no hidden-charges and more.

To Conclude

A Personal Loan underwriting is the process of assessing creditworthiness. Further, it helps the lending institution understand whether or not a potential borrower will be able to repay the loan on time.
Depending on the type of loan you are applying for, the process can take either a few minutes or a few days/weeks. To ensure a smooth underwriting process, get all your documents in order, avoid applying for loans from multiple lenders, and boost your creditworthiness.

ALSO READ :- The Ultimate Guide to Comparing Personal Loan Interest Rates

Frequently Asked Questions About Loan Underwriting Process

1. What are the 4 Cs of loan underwriting?
Capacity, capital, collateral, and credit are the 4 Cs/components of loan underwriting. They stand for capacity to repay the loan on time, the capital that you can convert to cash, collateral to pledge as security, and credit score and history to assess your creditworthiness.

2. Why do you need loan underwriting?
Loan underwriting is needed for lenders to assess the risk involved in providing a loan. Through this process, lenders do a thorough check of your financial condition to verify if you will be able to repay the loan.

3. How do banks underwrite loans?
Banks/financial institutions usually have financial analysts or hire underwriters to assess the risk involved in approving the loan and the creditworthiness of the borrower. The underwriter applies the lender’s conditions and the underwriting rules to the borrower’s loan application.


We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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