Personal Loans for the Self-Employed
Get access to revolving funds when you need it most.
Applying for a personal loan when you’re self-employed can be more challenging than applying for loans while working for an employer. While the latter can present a W-2 form from their employers, the former doesn’t have the same option. Self-employed individuals may need to show proof of income in another way.
As a result, lenders are more likely to put your personal finances under a microscope to ensure that you’ll have enough income to repay the loan. Although qualifying for personal loans for self-employed individuals can be challenging, it’s certainly not impossible.
In this article, we’ll break down all you need to know about self-employed loans if you work for yourself:
Ready to apply for a Personal Loan?
What are Personal Loans?
Personal loans are financing options that people apply for when they need to fund big purchases. It’s different from other types of self-employed loans. Unlike student loans or mortgages, which are intended for specific expenses (i.e., to pay for tuition or a home purchase), borrowers can use personal loans for any personal expenses. That said, the most common use of self-employed loans is to consolidate high-interest credit cards or loans.
Ready to apply for a Personal Loan?
How Personal Loans Work
Once you’ve been approved for a personal loan, the lenders will give you a lump sum upfront. This is done through a check or a cash deposit into your account so that you are able to withdraw the money as needed. Repayments on the loan will be required through fixed monthly payments over a specific period of time – usually between one to five years.
Self-employed loans can either be secured or unsecured. Secured personal loans require borrowers to present an asset to act as collateral for the loan, whereas unsecured personal loans do not require collateral. Lenders face a higher risk with unsecured loans which means they are typically more stringent with those approvals. Lenders may evaluate this risk by looking at the borrower’s credit reports, income stability, and credit utilization.
Low-risk borrowers are those with good credit standing, that have proven income stability and a low debt load. These individuals can usually qualify for higher loan amounts and lower interest rates. Conversely, high-risk borrowers lack collateral, have low credit scores, unstable income, or have higher debt obligations. Although these individuals can still qualify for self-employed loans, they are less likely to receive loan terms as favorable as those who can present a good financial background.
Ready to apply for a Personal Loan?
Acceptable Proof of Income for Self-Employed Individuals
As previously mentioned, self-employed individuals don’t have a W-2 form. In its absence, here are the documents you can use as proof of income:
Tax Returns
Lenders will typically ask you for two or more years’ worth of returns. This will give them a better picture of the inflow of cash to your accounts, and help them verify whether or not you have a stable income. Lenders may put less stress on a borrowers’ tax returns if that borrower has a good or excellent credit standing (credit rating higher than 670).
Schedule C Document
If your business is a sole-proprietorship or a Limited Liability Company (LLC), lenders may require you to submit the most recent copy of your Schedule C form. This form outlines all of your company’s profit and loss. This information lets lenders know the extent of your cash flow and, ultimately, your monthly earnings. The higher your profit, the higher your chances for loan approval.
Schedule SE Document
In addition to the Schedule C tax document, lenders may also ask for your Schedule SE tax document. The Schedule SE is the tax document that breaks down the taxes you have paid as a self-employed individual. This will serve as the lender’s evidence that you are indeed paying your taxes using your business’ income. In cases where you can’t produce a Schedule SE document, or if lenders see an issue in your Schedule SE tax document, you’ll be tagged as a risky borrower and may have your loan application rejected.
Bank Account Statements
Bank account statements will give lenders an overview of your assets and savings. Your bank account statement could also show your cash flow over several months, thus proving a stable and consistent income.
Ready to apply for a Personal Loan?
How to Apply for a Personal Loan
If you’re self-employed and are planning to take out self-employed loans, here’s a guide on how you can apply for one:
Ready to apply for a Personal Loan?