Discretionary loans stand apart from typical automated approvals by involving a hands-on review by a loan officer or committee. Unlike online applications that deliver near-instant results, a discretionary loan undergoes a detailed process known as manual underwriting. Here, a lender evaluates your full financial picture and personal circumstances before approving the loan.
Central to this evaluation is the use of the “5 Cs of Credit” — Character, Capacity, Capital, Collateral, and Conditions. These help the lender assess your reliability, ability to repay, financial investment, security for the loan, and the loan’s purpose and context. You can learn more about these credit principles in our guide on the Creditworthiness Assessment.
Discretionary loans are particularly beneficial for borrowers with complex financial situations that don’t fit automated lending criteria. This includes self-employed individuals with fluctuating incomes, small business owners without an extensive credit history, applicants recovering from past credit issues, or those seeking financing for unique assets.
This personalized approach may take several days or weeks, but it allows lenders to consider more details than credit scores alone. To improve your odds of approval, establish strong relationships with local banks or credit unions that offer discretionary lending. Prepare thorough documentation such as tax returns, bank statements, business plans, and explanations of your financial history. Demonstrating substantial personal investment—or capital—can also strengthen your application.
Compared to most conventional loans processed via automated systems, discretionary loans offer flexibility but often require more time for evaluation. They are common in private business loans and certain personal loan products. For contrast, explore our article on Automated Underwriting System (AUS) to understand how non-discretionary loans work.
In summary, a discretionary loan offers a human element in lending, tailoring decisions to your unique financial details beyond rigid algorithms. For borrowers with special circumstances, this approach opens access to credit that automated systems might reject.
References:
- Creditworthiness Assessment, FinHelp.io: https://finhelp.io/glossary/creditworthiness-assessment/
- Automated Underwriting System (AUS), FinHelp.io: https://finhelp.io/glossary/automated-underwriting-system-aus/
- SBA 7(a) Loan Program Overview: https://www.sba.gov/funding-programs/loans/7a-loans
External Resource:
- U.S. Small Business Administration manual underwriting information: https://www.sba.gov/partners/lenders/7a-loan-program/underwriting-criteria