Try it now
Digital transformation

The Essence And Steps of Digital Loan Origination Process

Digital Steps Of Loan Origination Process 

The industry of finance is now rapidly shifting its strategic focus on customer engagement and satisfaction by putting its priority on fulfillment of customers’ expectations first. Customers want accessible, convenient, and timely services.

How to win the loyalty of customers and ensure their retention when the loan origination process—the cornerstone of lending—becomes a stumbling block? What is the way to simplify the process and make it smooth and seamless for customers? Read on the article.

The process of loan origination is cumbersome, overburdened with paperwork, and often takes from 35 to 40 days. The rising use of digital automated systems has become a breakthrough making it easier, faster, and customer-friendly. 

What is behind loan origination automation?

Financial institutions (FIs) need to use it to their advantage to stand out from their competition by leveraging modern digital systems. The systems that automate and manage the loan application and process of fund disbursement are known as the loan origination systems (LOS).

Loan origination software implementation is now responsible for managing every step of loan origination from pre-qualification to funding the loan. 

Let’s take a look at all steps of loan origination and see how LOS can benefit FIs and their customers. 

Loan origination process flow step by step

Though a commercial loan origination process may vary according to the type of lender or loan, in general, the flow consists of 7 main steps, as shown in the image below. 

loan originiation stages

Step 1. Pre-qualification process

Pre-qualification is the initial stage of the loan origination process. At this step, the lending company screens and checks the eligibility of a borrower for a specific loan and carries out the authentication procedures. 

The borrower is requested to submit documentation needed to prove the identity to the lender for getting the loan. The requested documents may be:

  • ID proof (passport or any other ID card)
  • employment status confirmation, or any certificate declaring income status
  • credit score
  • previous loan bank statements

After the documentation is submitted by a borrower, the lender verifies them, either manually or via leveraging automated software systems. When the stage of verification is completed, a borrower can proceed with the process of application.

Step 2. Loan application

At this step, a borrower makes a loan application, sends relevant information to make a request for getting a loan. The lender gets all the compulsory details about the deal from a borrower and goes on with processing of application and loan underwriting.

This is usually the most overburdened with paperwork stage, involving a lot of paperwork. Lending organizations are leveraging special digital systems and ensure applying for loans via self-service portals. The implementation of digital loan origination systems allows reducing human error probability and makes the application process much faster.

Step 3. Application processing

After submitting the loan application, the lender processes it. Sometimes, the procedure is time-consuming as well because multiple departments are one by one involved in reviewing the application. 

If the loan application requires corrections or any information to add, the verification department will contact a potential borrower. This may take from weeks to months, when the application is processed manually.

Modern banks, FIs, and alternative lenders are using automated digital loan origination solutions. Loan origination systems are able to process the application instantly by using alternative data sources and points to customer eligibility assessment. If important files are missing, the application returns to a borrower, and the relevant departments are notified about it.

Step 4. Underwriting process

Underwriting is a process when the received customer financial information is analyzed by the lender to make a decision on what funding can be allocated. At this stage, all the parameters are checked for evaluation of the borrower’s eligibility and calculation of credit, risk and other scores. 

LOS usually do the calculations of these scores and generate the criteria for scoring that are unique for each lender. The process is often fully automated and is performed by a rule engine in LOS. Lenders load in a rule engine the set of specific underwriting guidelines for each product.

Step 5. Credit decision

According to the results of underwriting, the lender makes  a credit decision. At this stage, the lender decides if to approve the application, deny it or send it back to the borrower requesting additional information.

The process is also handled by a LOS because it can fast and easily assess various risk factors and scores due to leveraging AI and ML technologies. If some criteria don’t match the set of rules deployed in the system engine, changes are automatically applied to the predefined parameters, such as differentiation of interest rates or reduction of loan amount.

Step 6. Quality check

Quality checking is the next stage of the process of loan origination. The stage is critical to lenders because the financial sphere is highly regulated by legislation and government bodies.

The lender makes the last analysis of the application before fund disbursement to ensure the application is free of errors and fully compliant with internal and external rules and regulations.

Step 7. Loan funding

Fund disbursement is the final stage of the loan application process. When all the required documents are verified and signed, the funds become available for the borrower.

LOS can track the process of funding as well to ensure that all the necessary papers and documents are executed correctly before or together with fund disbursement.

Digital loan origination. ROI improvement coupled with customer satisfaction

Workflow improvement is the main strategic goal of FIs in the market now. Efficient LOS implementation positively results not only customer experience but also ensures better ROI. 

Digital loan origination is not just the moment when a loan is in effect. It’s the automation of the whole process of applying, documentation reviewing, and agreeing to disburse a loan. By making the process fast, accurate and easy, you buy customers' loyalty by selling loans.

FIs that are focusing on the loan origination process automation adopt modern technologies, such as APIs, microservices, Artificial Intelligence, and Machine Learning. The conjunction of the advanced technologies with traditional loan origination systems can significantly decrease the time of loan application processing and cause operational costs reduction.


How does a LOS work?

A loan origination system (LOS) purpose is the end-to-end automation and management of loan processing stages from the moment of loan application to fund disbursement. 

What is the loan origination process?

Loan origination is the process when a borrower applies for a new loan, and a lender processes that application. Origination generally embraces all the steps from taking a loan application up to disbursal of funds (or declining the application).

What is the first step in loan origination?

The first step of loan origination is a pre-qualification when borrower’s authentication and eligibility for an applied loan is checked.

What are the 3 C’s of underwriting?

The 3 C’s of underwriting are credit reputation, capacity, and collateral. 

Privacy Settings
We use cookies to enhance your experience while using our website. If you are using our Services via a browser you can restrict, block or remove cookies through your web browser settings. We also use content and scripts from third parties that may use tracking technologies. You can selectively provide your consent below to allow such third party embeds. For complete information about the cookies we use, data we collect and how we process them, please check our Privacy Policy
Consent to display content from - Youtube
Consent to display content from - Vimeo
Google Maps
Consent to display content from - Google
Consent to display content from - Spotify
Sound Cloud
Consent to display content from - Sound
Get in touch