Personal Loans for the Self-Employed
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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:
What are Personal Loans?
How it Works
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.
Acceptable Proof of Income for Self-Employed Individuals
Schedule C Document
Schedule SE Document
Bank Account Statements
How to Apply for a Personal Loan
Pre-qualify for a Loan
To pre-qualify for a personal loan, the lenders may ask you to provide the following information:
- 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
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
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
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
- 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.