For alternative lenders, the loan underwriting process in 2021 isn't what it's been in years past. Not only has COVID-19 upended just about everything, but it's harder than ever to assess the risk inherent in each one of your loans, and that's a problem for those that depend on this risk assessment to save them from loans that could be detrimental to their business.
To clamp down on that risk, many lenders have thrown up additional hurdles and road blocks to make it more difficult to obtain a loan, but that's no way to serve your business' market, especially in a time of need. While lawmakers may be trying to pressure banks to loosen their purse strings and ignore red flags, approving loans without properly assessing risk could prove costly for your business.
So how can you balance the need to underwrite risk without throwing caution to the wind and disrupting your entire loan underwriting process? Let's take a look at a traditional loan approval and see where improvements can be made.
The Loan Approval Process
Whether a customer is in need of a personal loan to help close the gap until payday, to buy a car or finance a vacation, a loan must be approved by someone at some point. That means gathering a bunch of documentation and other financial material and determining whether the loan should be granted.
First and foremost, it's about determining your business risk for the loan. It's one of the most important pieces of the loan underwriting process, and it all starts long before you would ever consider funding the loan. In addition to the all-important credit score, a bit of credit history and other documentation can go a long way towards understanding if the customer is likely to pay their debt or if there's a chance of defaulting.
Inevitably, at some point in the loan underwriting process you'll want to look at a customer's debt to income ratio, or DTI. A DTI is basically the monthly burden of their existing debt divided by their monthly income. Typically, anyone spending more than half their gross income on debt is on the wrong side of the spectrum to qualify for most loans, but other factors may work in their favor.
Those that have consolidated their debt may be seen as less of a risk because they're actively working to reduce and payoff their debt, but it's also not unheard of for errors to affect someone's credit score while their actual risk hasn't changed. That's why it can be beneficial to ask for and review additional financial information from your customers -- to make better decisions during the loan underwriting process.
While many lenders may just lookup a credit score and assess the risk off that, a credit score doesn't always give you the full picture. A poor credit score could be a function of not having enough remaining credit to balance out their debt, not an inability to pay. If a customer can show stable income -- or even additional sources of income -- you may want to reconsider. With additional financial documentation, the risk could be perfectly acceptable, though that means additional resources and time to help review and manage it all.
How an Automated Loan Processing System Can Help
Compared to legacy lending systems, today's lending software makes short work of the typical loan underwriting process, as well as everything else that goes into managing every one of your loans. In addition to leveraging all that modern technology and the cloud have to offer, an automated system can often be configured to meet your exact need, in addition to making it easier to make decisions at every step of the loan lifecycle.
For customers, they'll get more than just another generic shopping cart -- a real account portal awaits them, with guided applications and an easy-to-understand workflow that removes all the confusing roadblocks that are commonplace in the loan underwriting process. Verification helps ensure that all information is entered correctly, and as a lender you'll also have access to additional data points that can help you make decisions about creditworthiness.
If there's any paper changing hands, it can be digitized and automatically sent back and forth during the decision-making process, significantly reducing the time spent for materials stuck in the mail or in transport. Instead of questions about accuracy and whether all information has been collected, you'll be able to see at a glance the important bits of information about any account -- or just input your parameters and let the software make the decisions and take care of it for you.
Better, More Accurate Decision Making
With the power of automation in your loan underwriting process, you'll be able to make better decisions while also removing the tediousness of the manual processes that are always rushed and prone to human error anyway. By automating much of it, you'll gain valuable time and resources to make better decisions where it counts most, such as the type of loan products that you should be doubling down or whether you may want to consider abandoning certain products due to risk.
Rather than having to look at each loan application to verify details and decide what the best course of action is, why not let your loan management software do much of the busywork for you and automatically approve well-qualified applicants. That'll give you more time to screen those edge cases, and you can filter those into different buckets before you take a look, too.
Delegate what you want and focus on the things that matter. Loan management software makes it all possible, all while you spend less time, money and resources on it. Forget about misplaced paperwork and waiting for days or weeks for information to come in through the mail. Automation can streamline much of the loan underwriting process, as well as the entire lifecycle of all your loans.
Analyze and Improve Your Lending Business
Beyond the benefits we've already discussed, incorporating loan management software in your lending business can help you do more than just optimize your loan underwriting process, it can revolutionize your entire business. When you have access to the data that powers your business, you'll be able to make better decisions and do more with the time, money and resources that you do have, impacting your business in far more positive ways than reviewing that next loan application.
Better analytics allows you to identify the best loan product type or a customer base that is better aligned with what you have to offer. It can also allow you to determine which borrowers give you the best return on your investment, enabling you to be smarter about who you market your services towards or who you may want to expedite through the loan underwriting process.
For those that may be prone to delinquencies and other challenges, you can build in more stringent checks when you have all that useful information up front. Not only can that help reduce your risk, but it can also reduce the time that you spend on those challenging applications. Deny them outright with the power of automation, or send them over to a more junior underwriter to take a look before you sit down for your review.
Generally, you'll be able to streamline your entire application process, adding the efficiencies of automation when you'd normally slow down the process with a manual check. Instead of spending your time on tedious tasks that are prone to human error, you can leave much of the hard work to your loan management software platform. Decision rules and workflows are much more scalable than any human resource you could muster, and that gives you the ability to compete in the fast-moving lending space.
How Optimizing Your Loan Underwriting Process Can Revolutionize Your Business
Most alternative lenders could stand to greatly benefit from optimizing their loan underwriting process. For most, however, the biggest gains to be had are from implementing a loan management solution, not in dissecting their existing manual workflows. By getting all of that time-intensive work out of the hands of associates that have better things to do than checking for errors in loan applications all day, automation can help you dial-in your application process, making it easier and more straightforward for customers to apply and get an answer quickly.
Let automated scoring sort all those applications so that you only need a cursory manual look to ascertain the risk, enabling you to more quickly move through that backlog and get answers to those that are waiting to hear from you. For more complex applications, you can set aside the resources that you're saving elsewhere to accurately evaluate those edge cases -- or you may decide to only accept certain ideal candidates and eschew the rest. It's all up to you and how you'd like to use all that time and money you're saving.
In addition to an increase in speed and efficiency during the loan underwriting process, a loan management system also helps ensure consistency throughout -- from application to approval and beyond. With all the efficiency gains and the extra information available at your fingertips, you'll have everything you need to run your lending business.
If you're an alternative lender, there's no better platform than Infinity. It's loan management software specifically designed for the short-term lending industry, and it makes processing loans and growing your business a snap. Whether you're a smaller lender with dozens of clients or a larger lender with millions, Infinity can help you more efficiently run your lending business. Schedule a demo today to find out how!