Loan applications can appear to be highly vague and opaque processes to most of us. Each applicant receives different interest terms, while some are even rejected by the lender. Which brings up questions such as – why do some loan applications get rejected? Who decides whether you are to receive an equally favourable interest rate as the person beside you? Are these decisions made using objective methods?

The Underwriter

If you are interested to find the answers to the questions listed above, then welcome to the world of underwriting. In a nutshell, an underwriter is a company or an individual whose job is to assess the lender’s risk in loaning the applied sum to you. Based on this assessment, the underwriter then recommends an interest rate that is proportionate to the risk faced. Hence, in theory, people with the same amount of risk are offered the same interest rates.

How does an Underwriter decide?

Similar to a detective, an underwriter relies on a variety of sources to investigate your personal finances before comparing their findings to company guidelines. As such, your loan application is likely to be passed back and forth between the underwriter and the loan processor multiple times, coupled with several verification calls being made to you.

While the process may be slow and tedious, however a thorough background check and credit assessment is a trait among the best money lenders in Singapore.

Sources of information that may be used are:

• Your application form – basic information
• Your employer – to confirm your employment and declared income
• Banks – bank statements
• Credit card companies – payment behaviour

Success determinants

Three main determinants are used in quantitative based models to measure risk:

1. Credit – Do you make payments on your debts on time? Do you have a history of defaulting on payments? What is the value of total debt outstanding that you hold, and is it comparable to your annual income?
2. Capacity – Do you have the ability to pay back the loan? Do you have other outstanding loans or debt? Do you have sufficient disposable income to after taking into account daily living expenses?
3. Collateral – If a secured loan is being applied for, then is the forecasted market value of the collateral sufficient to cover the debt?

Other qualitative factors may include the purpose of the loan, how adverse to risk you are and whether there is reason to doubt your willingness to repay the loan.

Conditional Approval

Once the underwriter is satisfied with your credit worthiness and has determined the appropriate interest rate, your loan processor will inform you. At this point, you have been granted conditional approval, which means that so long as you fulfil closing conditions such as updating your bank statements, you will be cleared to close the loan.

If you are looking to take a personal loan in Singapore, then this article will have given you a basic overview of the entire underwriting process. However, the process does differ from company to company, as such you should carefully enquire about what you can do to attain a lower interest rate at a licensed money lender, before proceeding.