If you have recently been shopping around online for a personal or small business loan, you might have noticed that the approval process can be instantaneous. Simply by inputting the necessary information and one click, funds are deposited into your account. This is much different than the traditional route of 10-30 days of qualifying process, paperwork, and personal interview.
How is this process done? And what are the positives and negatives to this new kind of approval?
To start, technology is a major innovator for fast online approval process, also known as automated underwriting systems (“AUS”). These online systems are designed to evaluate loan applications based on the guidelines of the lender. These systems are applied not only for unsecured loans, but also auto loans, mortgage loans, and credit cards.
For a personal loan. Some of these guidelines include your income, bank account balance, employment history, your credit score, and public records. For a business, your revenue, years in business, and business profile are some required information.
One of the biggest advantages of this new system is the speed of approval. Traditional manual underwriting can take days or weeks to process a loan application because a loan representative must manually verify the borrower’s information.
With online underwriting, money is immediately sent to the bank of your choice after approval. Additional information may be required if there are any discrepancies or verification needed – such as proof of income by paycheck stub, or tax returns if you are a business. Often times, income verification is not required for loans that are within $5,000 or $10,000.
Another advantage of automated systems is the unbiassed qualification process. Because the parameters are done electronically, it reduces human bias and error when it comes to evaluating the loan application.
However the automatic approval can also be a drawback, because it can reject a loan application without getting the bigger picture of the borrower’s unique circumstances. For example, an auto loan lender might reject a borrowers application because of low income, but perhaps the borrower has additional income that cannot be shown through bank statements.
Also, dealing directly with the lenders rep can allow flexibility in their guidelines if they are trying to earn your business. Automatic systems do not have any flexibility because you are essentially dealing with a robot which cannot change the guidelines that have been programmed into its system. With human interaction, the lender can make exceptions.
The best approach is to apply electronically to see if you are preliminary approved for a loan and then based on your circumstances, speak to a loan rep from several different lending companies to see how flexible they can be to compete for your business, which then helps you save money on the cost of the loan.