How Lenders Check Credit Before Approving Personal Loans

Often times when applying for a personal loan, your credit report will be examined by the lender to assess your creditworthiness and understand how good you have been with credit handling. Many financial technology companies currently in the marketplace use risk scoring algorithms to quickly and accurately assess the suitability of applicants. Perhaps the biggest impact these algorithms have had is that they have enabled greater numbers of working class people to qualify for instant credit.
Alternative scoring has allowed fintech lenders to lend to underserved segments of society – mostly applicants who are employees of uncategorized companies (which are often turned down by banks for this reason) or those that have lower credit ratings than prime. The more popular fintech lenders in the market are using advanced risk scoring algorithms to provide a comprehensive picture in determining the creditworthiness of loan applicants.

A risk scoring algorithm typically evaluates the following:


For lenders, your creditworthiness is an extremely important parameter in determining your eligibility for an unsecured loan. Since unsecured loans such as personal loans do not include collateral, lenders have slightly stricter criteria when it comes to large loans compared to large loans such as home loans or car loans.

The risk assessment algorithm used by a lender essentially compares your creditworthiness to the lender’s underwriting guidelines. If your score meets the lender’s minimum criteria, the algorithm will evaluate other aspects of your profile. Note that even if your creditworthiness sometimes does not meet the lender’s criterion, the algorithm will check other parameters in your credit profile to verify that they are satisfactory and meet the lender’s credit standards. If so, you will still get approval with a lower credit score than the Prime which will result in your application being rejected many times by the leading banks in the market.

In fact, alternative scoring methods used by these algorithms have generally improved the approval rate for applicants with subprime credit scores.

Repayment history: In addition to your creditworthiness, your repayment history is an extremely important parameter that the risk assessment algorithm evaluates. Your repayment history is essentially a record of the repayments you have made to existing credit accounts. Details of your monthly EMIs, past and closed credit accounts, and active accounts (both loans and credit cards) are reviewed and compared against the lender’s internal underwriting guidelines.

Most lenders look for customers with a clean repayment history that is free from default and too many late payments. Late payments and failure to meet a monthly repayment obligation tend to have a significant impact on your creditworthiness, causing future lenders to turn down your application.

Total amount of outstanding contributions: Another aspect that these algorithms evaluate is your total outstanding balance due in credit accounts to get an idea of ​​how your monthly repayment obligations compare to your monthly income. When more than 50 percent of your monthly income goes into paying EMIs, many lenders often turn you down.

However, with good credit and repayment history, certain fintechs offer you loans with longer EMI periods (to make your monthly repayments affordable) to help consolidate your debt.

The main idea behind using these algorithms is to speed up the credit process and make the profile evaluations more accurate. These algorithms are super fast because once your credit report is checked by the office, they will instantly check your profile parameters and information about the approval or rejection of your application will be sent to your registered mobile number or email id almost instantly.

Aditya Kumar is the founder and CEO of

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