How the Underwriting Process in Personal Loans Works

Introduction

When you apply for a personal loan, the approval doesn’t happen instantly behind the scenes—it goes through a detailed evaluation known as the underwriting process in personal loan. This crucial step determines whether you're eligible for the loan, how much you can borrow, and what interest rate you’ll be offered.

In this blog, we will simplify what underwriting means, why it matters, and what rules and steps lenders follow to approve your loan application.

What is the Underwriting Process in a Personal Loan?

The underwriting process in personal loan is the lender’s method of assessing your financial risk. It helps them decide if you’re likely to repay the loan on time. During underwriting, lenders evaluate:

• Your income

• Credit score

• Existing debts

• Employment stability

• Asset ownership

Think of underwriting as a financial background check. If you meet the lender’s criteria, your loan gets approved. If not, they might reject it or offer different terms.

Why is Underwriting Important in Personal Loans?

Lending money comes with risk. The underwriting process helps banks and NBFCs reduce this risk by:

• Verifying your ability to repay

• Protecting their own financial interests

• Offering the most appropriate loan terms based on your profile

Ultimately, underwriting ensures that only creditworthy applicants receive funds, lowering the chance of defaults.

Types of Underwriting in Personal Loans

Lenders usually rely on two main types of underwriting:

1. Automated Underwriting

This is a tech-based system where software automatically reviews your application based on pre-set rules. It considers:

• Credit history

• Monthly income

• Debt-to-income ratio

• Loan amount requested

Benefits: Faster approvals, fewer manual errors, and real-time decisions. Most digital lenders and NBFCs use automated underwriting.

2. Manual Underwriting

In this process, a loan officer personally evaluates your documents and profile. It’s ideal for:

• Applicants with thin or no credit history

• Freelancers and self-employed individuals

• People with non-traditional income sources

Manual underwriting may take longer but is more flexible for unique financial cases.

Key Rules in the Underwriting Process

Every lender sets their own internal underwriting guidelines, but these are the standard criteria used to assess personal loan eligibility:

1. Credit Score

A score of 750 or above is generally considered good. Higher scores mean:

• Lower interest rates

• Higher approval chances

• Better loan terms

2. Income Verification

Lenders assess both gross and net income. Salaried individuals must submit salary slips or Form 16, while self-employed applicants provide ITRs or audited financials.

3. Debt-to-Income Ratio (DTI)

DTI shows how much of your income is used to pay debts. A ratio under 30% is ideal. Higher ratios may lead to rejections or higher interest rates.

4. Employment History

Stable employment (at least 6–12 months with current employer) or consistent business income boosts approval chances.

5. Collateral (for secured loans)

Although most personal loans are unsecured, if you’re applying for a secured version, your collateral should match or exceed the loan value.

Steps Involved in Personal Loan Underwriting

The underwriting process follows a standard sequence:

Step 1: Application Review

The lender checks your application details, including loan amount, purpose, and tenure.

Step 2: Financial Document Verification

Income proofs, bank statements, and credit reports are reviewed to assess repayment capacity.

Step 3: Credit Check

Lenders pull your credit score from bureaus like CIBIL to evaluate your credit history.

Step 4: Debt Analysis

Your current loans, credit card usage, and liabilities are analyzed to compute your DTI ratio.

Step 5: Risk Assessment

Based on the data collected, your risk profile is built. This determines if your application moves to approval.

Step 6: Loan Approval and Disbursement

If everything checks out, your loan is approved and the funds are disbursed—sometimes within 24–48 hours.

Documents Required During Loan Underwriting

To ensure a hassle-free underwriting process, keep these documents handy:

• Aadhaar Card and PAN

• Recent passport-sized photograph

• Salary slips (for salaried) or ITRs (for self-employed)

• Last 6 months' bank statements

• Business proof (for self-employed applicants)

• Address proof (utility bill, rent agreement, etc.)

• Form 16 or audited P&L statement

• Employment or appointment letter

• Any existing loan repayment schedule

How Long Does the Underwriting Process Take?

The duration of the underwriting process in personal loan depends on the type:

• Automated: A few minutes to a few hours

• Manual: 1 to 5 working days (depending on complexity)

Timely submission of correct documents can significantly reduce delays.

How to Ensure a Smooth Underwriting Process

To boost your chances of approval:

• Maintain a high credit score (pay EMIs, credit card bills on time)

• Keep your DTI low by avoiding multiple active loans

• File your ITRs regularly if you're self-employed

• Provide accurate and complete documentation

• Avoid applying with multiple lenders simultaneously

To Wrap Up

The underwriting process in personal loan is a behind-the-scenes, yet crucial step in getting your loan approved. It helps lenders assess your creditworthiness and protects them from lending risk.

Whether your application goes through automated or manual underwriting, knowing what to expect—and preparing for it—can improve your chances of quick approval. So, the next time you apply for a personal loan, you’ll know exactly what’s happening behind the scenes.