How Lenders Assess Eligibility Without a Traditional Credit Check

Just because there’s no traditional credit check for certain loans doesn’t mean there’s no underwriting. Lenders still need a basis for deciding whether to extend credit and on what terms. The review may incorporate application data, bank account cash flow data, proof of income, current debt data, identity verification, a soft credit check, a combination thereof, or other sources.

While the general term itself isn’t a defined loan category, it is critical to understand what the authorization and privacy disclosures mean before providing any data. This is to understand what data will be reviewed and to whom the data may be shared, and whether a hard inquiry may occur later.

What “No Traditional Credit Check” Can Mean

A traditional credit check usually refers to a lender obtaining a consumer credit report in connection with an application. A hard inquiry generally appears on the borrower’s credit report and can affect credit scores. A soft inquiry can still use credit-report data, but it does not affect credit scores and is not shown to other companies that obtain the report.

There are many processes that utilize application data or soft inquiries, but reserve a hard inquiry for a later stage. Some may not utilize a credit report at all for the decision, but may utilize other verifiable alternative data. “No credit check” should never be interpreted as a promise of no consumer report, verification, or assessment of risk.

Information a Lender May Evaluate

There is no one definition for underwriting criteria when analyzing a loan application. A lender may consider a number of factors, where what is important for one type of loan may not be as important for another type of loan.

• Continuity of Income: The lender may consider how much income is available and the frequency with which it is received. The lender may also consider whether income is likely to be consistent during the period in which the loan would need to be repaid.
• Other Expenses: There are many expenses which a borrower is likely to have, including mortgage payments, rental payments, payments on other loans, credit card minimum payments, and basic living expenses. These may all affect the amount that is available to a borrower for a new payment.
• Bank Account Cash Flow: If a lender is given permission, the lender may review the account and determine if balance deposits, withdrawals that are recurring, payments which are returned, and payment overdrafts may affect the ability of the borrower to make another payment.
• Identity and Consistency of the Application: The lender may confirm that the name and address as provided during the application and when a borrower provides identification is consistent with the information that the borrower has claimed.
• Amount Requested and Term of the Loan: The requested loan may be considered in relation to the borrower’s ability to afford the payment. A smaller amount requested does not guarantee approval.
• Other Consumer Report Data: A lender may use a “soft pull” or another permissible consumer report instead of a “hard pull” credit check during the initial phase of the application.

Income Is Considered With Debts and Expenses

Income alone does not show whether a loan is affordable. A lender may compare income with required payments and expenses by using its own affordability method. Part-time employment and income outside traditional employment may require different documentation. No single rule applies to every lender.

Creditors cannot reject or disadvantage applicants simply because they receive public-assistance program income. When considering the applicant’s income, lenders may consider the amount and expected duration, as they may for other income. A statement of income and the stability of income may be kept as document proof, but this does not guarantee approval.

How Cash-Flow Underwriting Uses Bank Data

Federal financial regulators consider cash-flow information a form of alternative data. A lender may use account activity to estimate income and expenses. Use of that data must comply with applicable consumer-protection laws.

A lender using cash-flow underwriting may review recurring deposits, account balances, the timing of bill payments, recent overdrafts, returned items, and account withdrawals. The information may be one of several factors in the decision-making process. One low balance, for example, does not automatically result in rejection.

To ensure the account history is within an acceptable time period, verify the account access is for one-time or ongoing data access, the company conducting the access, and the procedures for account access revocation. A review of bank account history explains the transaction review, deposit account screening reports, and the differences from a traditional credit report.

Identity, Location and Product Rules Still Apply

Skipping a hard inquiry does not remove identity or legal-eligibility checks. When requesting a loan, a lender may request information including the applicant’s government-issued ID, Social Security number or other accepted identifier, date of birth, address, phone number, and evidence the applicant is the bank account holder. Evidence of account ownership may include a bank statement. Requirements may vary by lender and are subject to applicable laws and regulations.

Loan terms and permitted loan amount may vary by state. Prior to transacting with a lender of unknown status, research the lender’s authorization with the state banking or financial-services regulator. Just because a lender advertises online does not mean the lender is authorized to offer loans in that state.

Personal Loans, Bad-Credit Loans and Credit-Check Labels Are Different

Loan terminology is variable. A personal loan generally describes a consumer loan used for personal purposes and is often repaid in installments. The label does not reveal what underwriting data a lender will use. A loan offered to borrowers with poor credit may still include a hard inquiry, while a loan advertised as having no hard inquiry may use alternative data such as income or cash flow.

Accordingly, loans offered to bad-credit borrowers should not be treated as another name for loans offered with no credit check. The former focuses on the borrower; the latter focuses on one part of the assessment process. The terms of the contract, not the label used in marketing, dictate the cost and payment terms, collateral, and consequences if the loan payment is not made.

Documents That May Help You Prepare

Making information complete and consistent helps minimize further questions, but it can’t guarantee approval or a particular price. Useful records would vary by lender, but they may include:

• Recent pay stubs, benefit statements, tax records, or other proof of Lawful income.
• Recent bank statements (without electronic data connection).
• An itemized list of monthly required debt payments and major living expense payments
• Government-issued ID and proof of Address.
• The desired loan amount and an estimated length of time to repay the loan.

This information should not be manipulated or adjusted in any way. Inconsistent Information, leaving out debts, etc., may slow the review. It can also lead to a declined application or may result in a fraud concern.

If the Creditor Declines the Application

Alternative underwriting doesn’t relieve creditors from their obligation to give a reason for a denied application. Under federal rules, an adverse-action notice generally must give the principal reasons for a denial or tell the applicant how to request those reasons within 60 days. When a consumer report contributed to the decision, additional Fair Credit Reporting Act information may be required.

Use the notice to identify the issue rather than repeatedly submitting applications. A denial based on insufficient income, unverifiable information, recent banking activity, or a consumer report calls for a different response in each case. If information in a consumer report is not accurate, follow the instructions in the notice to submit a dispute.

Review Cost and Affordability Before Accepting

Approval addresses the lender’s concern of risk. It does not address the safety of the loan for your budget. When considering accepting a loan offer, compare the proposed payment with income left after necessary expenditures and allow room for irregular costs. Review agreements and disclosures for:

• APR and finance charge: APR allows for an apples-to-apples comparison of the cost of credit against competing offers, whereas the finance charge captures interest and certain fees in dollar terms.
• Amount financed and cash received: An origination fee may reduce the amount of cash you receive from the face amount of the loan.
• Payment amount, frequency, and total of payments: Longer loan terms can lower each payment, but increase the total paid.
• Late, returned-payment, and optional-product charges: Review which fees are charged and whether insurance or add-ons are optional.
• Automatic-payment authorization: Pay close attention to the terms and procedures associated with changing or revocation of authorizations.
• Collateral and default consequences: If the loan is secured, identify the property at risk and the potential loss.

If a loan payment leaves too little for shelter, food, services, transportation, and emergencies, then the loan is not affordable merely because it was offered. Consider creditor payment plans, lower-cost credit-union offers, employer assistance, and local aid before taking risky short-term loans.

Protect Your Information and Avoid Loan Scams

Use only a lender’s official and secure channel to submit your information. If someone offers you a loan but requests your banking PIN, verification/code, gift card, wire transfer, or crypto payment, just stop communicating with them.

If someone offers you a loan guarantee in exchange for an upfront payment, that is a warning sign of an advance-fee loan scam, according to the FTC (Federal Trade Commission). Some legitimate creditors charge an application/appraisal fee, but payment of such a fee does not guarantee credit.

The Bottom Line

When a lender does not rely on a traditional hard credit inquiry, it may assess information about your income, your debts, the cash flow in your bank accounts, your ID, and your requested loan amount; other information may be used as well. How a lender conducts that assessment depends on the lender and the product. Read what you’re signing and judge any offer by its complete cost and how it affects your budget.