Personal Loans for the Self-Employed

Get access to revolving funds when you need it most

Dane Panes

October 25, 2021

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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 applying for personal loans if you work for yourself:

Personal Loans

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 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 personal loans is to consolidate high-interest credit cards or loans.

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How it Works

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.

Personal 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 higher debt obligations. Although these individuals can still qualify for loans, they are less likely to receive loan terms as favorable as those who can present a good a financial background.

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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.

How to Apply for a Personal Loan

If you’re self-employed and are planning to take out a personal loan, here’s a guide on how you can apply for one:
How to Apply for a Personal Loan

Pre-qualify for a Loan

Pre-qualifying for a loan gives you a sneak-peek of the loan offers available to you based on your credit standing, debt obligations, and income. Some lenders may allow you to pre-qualify for a loan online using your phone or computer. Some may also perform a soft credit check so your credit score won’t be affected.

To pre-qualify for a personal loan, the lenders may ask you to provide the following information:

  • Birthdate
  • Contact information
  • Social Security number
  • Home address
  • Educational attainment
  • Source of income
  • Amount of outstanding debt
  • Reason for taking out a loan (i.e., home improvements, moving, consolidating debts, etc.)
  • Loan amount
  • Desired payment terms

If done online, the pre-qualification process can be completed in as quickly as a few minutes. The website will then redirect you to a page that displays the loans you’re eligible for, as well as the rates and terms for each. Others may send you an email containing the loan types you’re qualified for.

It’s also possible to receive a pre-qualification denial. Again, if this is a soft-inquiry, you won’t have to worry about it affecting your credit score. Reasons for denial may include:

  • High debt-to-income ratio
  • Inadequate income
  • Too many credit applications

Compare Rates and Terms

Before moving forward with your application, be sure to compare the rates and terms from different lenders first. Use your pre-qualified offers when deciding where to apply. Be sure to choose the one the best fits your current situation.

In general, banks may offer flexible payment options and low-interest rates. However, qualifying for personal loans from banks can be challenging, especially if you’re a self-employed individual with a less than ideal credit history. Alternative lenders are more willing to lend you money, but since they are taking on a bigger risk, they may charge you with higher loan fees and interest rates if you’re unable to present collateral or show a good credit background.

Gather the Needed Information Then Submit Your Loan Application

Once you’ve decided where you’ll apply, the next step is preparing the required documents. When applying for a personal loan, lenders will typically ask you for information, such as:

Personal Information. Personal information includes proof of identification, contact information, birth date, Social Security number, and sometimes, your citizenship status.
Financial Information. What is your current source/s of income? You may have to present your bank account statements, annual revenue, and debt obligations.
Proof of Income as Self-Employed Individual. This includes bank statements, tax returns, Schedule C, and Schedule SE tax documents.
Loan Application Information. This is where you explain why you need the loan and how much you need.

Read the Contract’s Fine Print Before Submitting

It’s always a good practice to read and understand the loan contract before proceeding to apply. Remember that once you hand over your loan application form, it will be considered a hard inquiry and will affect your credit score. Be sure that you know what the terms and rates are before you submit your application.

While going through the loan terms, you should pay attention to the following sections:

Reporting to the Credit Bureaus. It’s always best to work with financing companies that immediately notify credit bureaus of your payments. It will help you establish and improve your credit score, so qualifying for loans will be easier in the future.

Pre-payment fees or penalties. Some lenders may charge a pre-payment fee to borrowers who pay off their loan in full ahead of the designated schedule. Find out whether the institution from which you’re applying for the loan does so prior to completing your application. This way you won’t be caught off guard should you attempt to pay off your loan early.

Late Payment Fees. Your lenders can also charge you with late payment fees if ever you miss a payment deadline. Make sure you know what these fees are before completing your application so you know what you’re in for should you miss a payment.

Loan Repayment Term. Personal loans can have a repayment period of one to five years. The length of time you’re allowed to pay back the loan will depend on certain factors like the amount of borrowed funds, credit background, collateral, and income.

Mode of Payment.Traditionally, payments for loans are made over the counter. However, with the evolution of technology, some lenders now require borrowers to set-up an automated payment withdrawal from their personal accounts to avoid late payments. If you opt for the latter, be sure that your bank account always has enough money in it to pay for the loan. Otherwise you’ll get stuck paying for overdraft fees.

Once you’ve read through the fine print of the contract and agree to all terms, submit your application, and wait for the approval.

Complete the Final Approval Process

After you’ve completed the steps mentioned above and submitted the application, the lender will run a hard credit check. They will also ask for the following documents:

  • Identification
  • Address verification (bills or lease)
  • Proof of income (tax returns, Schedule C, Schedule SE, and bank statements)

Once the banks verify everything and find the right loan for you, they will process the approval and fund the loan. You’ll then receive the funds after 24 hours or within a week, depending on the lender.

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