How to Get a Personal Loan as a Self-Employed Person?

Being self-employed is beneficial in many ways. It allows you to decide your working hours, the freedom to work from home, and you can be your own boss. However, being self-employed also has a few disadvantages. To begin with, you don’t have the security of a monthly salary, paid leaves or employer-sponsored health insurance.

Not to forget, while starting as a self-employed person, managing your expenses can be tricky. Since you no longer have the luxury of a fixed monthly salary, you may need to dip into your savings. But setting up a business is an expensive affair. If you don’t have any finance readily available – you may need to apply for a loan.

Getting approval for a personal loan for self-employed individuals is slightly more challenging, as banks and lenders consider such candidates a bigger risk. But if a self-employed individual can prove their creditworthiness, some lucrative types of personal loans are available to them. However, banks and financial institutions are wary of self-employed individuals.

Types of Personal Loans Available to Self-Employed Individuals

Depending on financial needs and personal circumstances, self-employed people can choose from the following loan types –

• Unsecured Loans:

Unsecured personal loans are well-suited to those who need a lump sum to fulfill a particular financial need. Still, self-employed people need to have a good credit score to avail of a personal loan. Also, the interest rates on such loans are higher. Unsecured personal loans are not secured against assets.

• Secured Loans:

If you are a new business with little or no credit history to show, you may need to go for a secured loan. A secured loan is secured against your assets, typically your home or your company’s property. In a secured loan, a lender has assurance about the repayments. Therefore, even self-employed people can get low-interest rates.

• Business Loans:

Business loans are given to big and small businesses, including self-employed people, to help them with their business journey. Your lender will conduct a thorough analysis of your business to determine the viability of giving you a business loan.

• Bounce Back Loans:

Bounce back loans are special loans introduced by the government after the COVID-19 pandemic. The bounce-back loans offer small and medium businesses financial support, including self-employed people who have faced setbacks in their business due to the pandemic.

How to Apply for A Self-Employed Personal Loan?

A self-employed personal loan is a helping hand for any self-employed person facing financial problems. Many banks and lenders offer this finance category because getting a loan is a bit more difficult for self-employed individuals. Availing a self-employed personal loan is similar to a regular personal loan process. There are three steps –

1. Getting Your Documents in Order – Banks, financial institutions, and lenders look for at least six months of credit history to determine your worthiness as a loan applicant. Documentation for a loan application includes personal and business bank statements and other evidence to prove that you are an acceptable risk.
2. Check Eligibility – Check if you fulfil the eligibility criteria for the loan you plan to apply for. All banks and lenders will be happy to give you a preliminary assessment before you submit the actual application. Apply for only that loan, where you know you are eligible. A rejected loan application adversely affects your credit score.
3. Compare Options – There are various banks and lending institutions in the market. Always compare the interest rates and repayment terms to determine how much you can borrow. In some cases, you can borrow large amounts spread over a long time, depending on your financial requirement.

What Documents Will You Need to Provide?

The process of application differs from lender to lender. However, they will undoubtedly need to see proof of your incoming and outgoing finances. Therefore, your bank statements, wage slips, and credit history related documents are surely required. Talk to your potential lender to clearly understand the application process and confirm what documents you will need to provide with the loan application.

How to Improve the Odds of Getting a Self-Employed Loan?

Even though the self-employed personal loan is not quickly approved. You can improve your chances of getting a self-employed personal loan by doing the following:

1. Keep Accurate Accounting Records – Before filing a loan application, ensure that all transactions you do as a business are accounted for and up to date in the records.
2. Opt for Secured Borrowing – Secured loans are backed up by assets, so lenders will likely find your candidature more creditworthy for a secured loan.
3. Know Your Status – Self-employed people should specifically label their work status as contractors, freelancers, consultants, or landlords before applying for a loan. Your work status will influence the way a lender calculates your income.
4. Speak to a Broker – Brokers are knowledgeable about financial instruments. They can help you to identify the one most suitable for you. They can also help assess your eligibility and increase your chances of getting approval.

What Do Lenders Look For?

When you apply for a loan as a self-employed person, there will be a few essential factors that lenders will assess to understand your creditworthiness. Most lenders focus on your employment status and income. They ensure that you can afford the monthly repayments and run a thorough credit check.

What Can I Use a Self-Employed Loan for?

You can use a self-employed loan for many things. It can be used to finance the vehicular purchase, to cover the costs of hosting an event or renovating a property. It is advisable, to be frank with your lender about the purpose of taking a loan. If your loan terms limit the areas of use of the money – you should know before applying.

Self-employed personal loans can be a life-saver for those working hard to set up their gig. With good planning and impeccable documentation, you can avail of a self-employed personal loan at affordable interest rates.

Author Bio:

Tanya Singh works as a Content Marketer at LoanTube – a loan comparison marketplace where borrowers can connect with multiple lenders via a convenient and transparent application. She writes about topics related to personal finance and loans helping her readers in making smart decisions when they need to borrow. Yoga brings her inner peace and strength, and travelling brings her joy (besides her work of course).