Underwriting refers to an important part of the loan application process, but what exactly does it mean and how does it work? Knowing what underwriting is; how it works in principle and its overall importance, can help you improve your financial circumstances and could help you with financial applications. Furthermore, by understanding what underwriting is and the basic processes, you may be able to undertake positive practices to improve your credit rating.
We explain in further detail what this term means and how it works, in order for applicants and borrowers to better understand the terms in which loans are either accepted or declined.
What is Loan Underwriting?
Loan underwriting is a process carried out by lenders using statistical and behavioural analyses, in order to determine whether a particular applicant is likely to be able meet the requirements for the loan in question and the necessary repayments.
The process is stringent in nature, as a way of ensuring that lenders only grant payday loans to people who are more likely to be able to afford repayments, therefore helping to prevent people falling into unnecessary debt.
What Do Underwriters Look For?
The underwriters working on behalf of lenders such as Moneyboat access your financial information through the three main credit reference agencies: Experian, Equifax and Callcredit.
Our team then assess your credit score, as well as scrutinising other financial information in your credit file. Common questions posed during this process that are addressed by underwriting teams often include questions such as:
- How often does the applicant make late payments?
- Have they ever declared bankruptcy or been subject to debt collection?
- Do they pay credit card bills on time?
- How often do their cards go into overdraft?
- How well do they manage debts overall?
Underwriters may also want access to your recent bank statements to verify you receive a regular income, as well as to assess your spending habits. All of this information can help the lender to determine how well you manage your money and if you would be able to afford repayments on any loan you have requested to take out.
Therefore, if a lender declines a loan application, you may be encouraged to consider if a short-term loan is indeed the best option. Make sure to have considered other alternatives before deciding to apply for a loan like borrowing from a family member or a friend and consider carefully whether you truly need to apply for short term credit in the first place.
What is a Credit Search Footprint?
A credit search footprint is a mark left on your credit file, indicating that a lender or credit company has looked at your file and has run a credit check on your account. There are however, two types of credit search footprints; hard and soft footprints and online direct lenders will check your credit file, usually in the form of a hard footprint.
What is the Difference Between a Hard Search and a Soft Search?
Hard credit search footprint: A ‘hard’ search is carried out on a borrower that will remain on your credit for a minimum of 12 months. These kinds of searches are usually carried out for those applying for loans, credit cards or mortgages.
Soft credit search footprint: A ‘soft’ search does not leave a mark on a person’s credit file and is otherwise known as a ‘quotation search.’ A search of this kind is typically carried out when a customer has used a loan company’s eligibility calculator to see if they meet the criteria without making an application requiring a full credit check. Alternatively, it may be used to check the credit file of a person whose account is linked to the main borrower’s such as a spouse.
What Are the Potential Impacts of Credit Footprints?
Search footprints on your account do not necessarily impact your credit score, but they can affect the chances of your loan being approved. This is because lenders can use this data to track your credit activity. Having a very high number of search footprints on your credit file, especially within a short period of time, can indicate desperation for funds (with many lenders having to have made credit searches) and lenders may then be hesitant to grant the loan.
However, lenders might also be hesitant to grant a loan if your account has no search footprints at all, as his can indicate a lack of credit activity altogether, and lenders may not feel confident enough to lend to you. According to CheckMyFile up to 12 search records per year is considered a healthy amount.
How Do Direct Lenders and Online Brokers Affect Your Search Footprint?
When dealing with online brokers, prospective borrowers are sometimes able to submit their details into an application engine or comparison page, which then distributes that information to various different lenders. This process happens all at once in order to find a lender that is more likely to accept the application.
Since many lenders are then reviewing their application and performing credit checks, the borrower’s account receives many credit search footprints. As mentioned above, this could damage the borrower’s chance of being approved for a loan. Choosing to work with a direct lender means that you have more awareness of when a credit check is being performed.
Remember to act responsibly when it comes to applying for loans. It is important that you undertake thorough research and find a company that best suits your needs in order to minimise the number of credit search footprints on your account. In doing so, you may increase your chance of being approved by a creditor.