What is Underwriting?

Underwriting is the process by which lenders decide if a person is eligible for a loans product. Eligibility is measured in a number of ways, essentially in order to decipher if a person is a low-risk customer and are trustworthy enough to make repayments each month.

A loan provider will make their approval or decline decision based on the profile of that applicant. Factors that are looked at include: your age, your occupation, your credit history, where you live, and your income.

Naturally, analysing your credit history is important for a lender to determine how much risk they take on. This is especially the case for products we feature such as payday loans for bad credit.

If you have a steady, monthly income that reflects that you will be able to make your monthly repayments, you are more likely to be granted an unsecured loan than if you have an irregular income. This is why it can be harder for people who are self-employed to get hold of an unsecured loans product.




Basic Methods

Age: Underwriters will look at whether certain age groups have higher or lower default rates than others, and whether there a correlation between age and repayment likelihood. If there proves to be a trend in past data, it may result in certain age groups finding it hard to obtain a loan than others.

Location: An underwriter will study data on loans repayment in different regions of the country in order to find out if there are some areas of the UK that are better at paying on time than others.

This is Money showed that areas of Northern Ireland, Wales and West Midlands have higher level of debts than other parts of the UK. This may cause lenders to be more restrictive when lending to applicants from these regions.

Residential status: Some underwriters believe that homeowners are better candidates to lend to since they would have already gone through the rigorous credit and affordability checking to get a mortgage. Plus, they have security in their home that they could also use to raise finance for repayments such as second mortgages, equity release and remortgaging – but this doesn’t mean that a homeowner could still have debt and be behind on repayment.

Employment: As we have seen, it is often considered to be safer to issue a loan to somebody who is not self-employed or only working part-time. If you have a reliable monthly income, you are less of a risk to a lender. This does not mean that you cannot get a loan if you do not have a regular income, it simply suggests that certain loans products such as a guarantor loan may be better suited to your situation.

Credit History: Most lenders will have a minimum credit score required to be eligible for a loan. This data is accessed by their partnership with a credit reference agency like Equifax, CallCredit or Experian and the lender will pay something like £1 or £3 each time to review their records. Some lenders have a minimum score to be eligible for the next stage of underwriting.

Most lenders will usually work these aspects of underwriting into the initial criteria that you see on a website or their basic application. For instance, companies will often say from the outset that applicants need to be over 18 or in employment as a way to quickly narrow down their ideal candidate.

Behavioural Underwriting

Behavioural underwriters use more detailed, demographic analytical tools by which to decide whether or not you are eligible for a loan.

They may look at the following information:

  • Time spent on the site
  • Whether you read the terms and conditions
  • If you are a repeat visitor of their site
  • Your gender
  • Whether you are married
  • Whether you have children
  • Whether you have used a loans product before

Most lenders will not use behavioural underwriting alone to assess a candidate – thorough credit checks will be carried out in order to get an accurate financial picture of the prospective borrower.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.