Applying for a personal loan when you are self-employed may require a bit more effort than if you had a steady hourly income or were a salaried employee, but that does not mean it is impossible. The application process just requires more documentation to prove that you are a trustworthy borrower. Because the income from self-employment tends to fluctuate, lenders typically view self-employed individuals as high-risk loan candidates which means to get approved for a personal loan, a self-employed individual may need a co-signer or could be subject to higher interest rates and stricter repayment terms.
If you are self-employed and need to apply for a personal loan, there are a few factors to keep in mind as you go through the application process to ensure you are approved for the loan you need under the most favorable terms available.
The Loan Application
Personal loan applications require disclosure of relevant personal, financial, and employment information as well as an explanation of why you need the loan. Before giving you money, the lender wants to know that you have consistent, reliable income so that you can afford to repay any borrowed money. In addition to checking your credit history and maybe even your criminal background, the lender often requires supporting documentation to establish your ability to repay the loan and any other financial obligations that could impede repayment of a new loan. Depending on your circumstances, the application may also require a co-signor, that is someone who will agree to be responsible for the loan in the event you default on your obligation. Collectively, this information is used to determine whether to approve you for the loan, what the interest rate will be and the terms of repayment.
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Proof of Income
For traditional workers, proof of income is a simple as providing the lender with a couple of pay stubs or a W-2. Establishing consistency in income can be more challenging when you are self-employed, and your earnings fluctuate from month to month. Lenders want to see that you have a steady income and can afford to repay the money you borrow on time. While your business may be flourishing, the amount of revenue claimed for business expenses can drive down your income which can call your ability to afford the loan into question. Therefore, applying for a personal loan when you are self-employed requires more documentation to provide the lender with an accurate snapshot of your cash flow and ability to repay the borrowed amount over time.
If you are self-employed, you should be prepared to provide several documents to prove your earnings, including bank statements, tax returns, and other tax documents. Depending on how your business is structured, the lender may ask for a copy of your company’s most recent Schedule C tax document as further evidence of your earnings from your business. You will likely be asked to provide the lender with a copy of your most recent 1099-MISC tax form as well as your Schedule SE tax document which is further proof of how much money you make, how consistent your income is, and whether you have paid taxes appropriately on your income.
If your adjusted gross income is insufficient for the personal loan you need, you may consider applying for a secured loan that is backed by collateral which minimizes the lender’s risk in loaning you money. A co-signer is also an option if you cannot qualify for the loan based on your income alone.
Credit History
An applicant’s credit history is just as important to a potential lender as the applicant’s income. Before approving a personal loan, lenders want to know that the borrower not only has the means to repay the loan over time but that the borrower is reliable. To establish a personal loan applicant’s reliability for repayment, lenders look at the applicant’s credit history to see how previous debts were managed. Lenders consider what kind of debt the applicant has, how many outstanding debts are owed, what kind of debt the applicant has, and if the accounts are in good standing and free from any missed or late payments. To improve your chances of approval for a personal loan, you need to make sure your credit history is strong and free of any missed or late payments on other financial obligations, and that your credit score is high.
The Lender
It is always a good idea to shop around to make sure you borrow from a lender with the best terms that fit your needs. Whether you choose a bank, online lender, or credit union as your loan provider, it is important to select a lender with personal loan policies that are favorable to self-employed borrowers. Once you commit to a lender, a hard credit check will impact your credit score, which can be frustrating if your loan application is subsequently denied. Therefore, it is wise to explore your options with lenders who allow self-employed individuals to complete a pre-qualification process that requires only a soft credit check, protecting your credit score in the event you decide to choose another lender. This will give you insight as to whether your application is likely to be approved and under what repayment terms to ensure you select the lender that is the best fit for you.
While you may decide to apply for a loan that can offer you the lowest rate, you may also want to consider lender ratings and reviews, and what the lender’s policies are for self-employed individuals.
