When you’re going through the process of applying for a personal loan, you may have to jump through some hoops before the end is in sight. The length of the application process can vary depending on the lender, but even if you’re the ‘perfect’ candidate with all of the necessary qualifications, there are going to be some unavoidable steps you need to go through before you can be approved.
Now, if you’re looking for a personal loan and you’re self-employed, you may have an even more challenging time going through this process. Your options could be more limited than someone with a more traditional full-time employment, and you may have to get over a few more hurdles to ultimately be approved for a loan. But this doesn’t mean that you won’t be able to find a loan that suits your needs.
If you’re self-employed and looking for a personal loan, you’ll need to have an idea of what the requirements are and what types of loans are available. In this article, we’re going to go over some of the potential requirements and look at a couple of things that may help you get approved. We’ll also go over a few alternatives to personal loans.
Is it Possible to Get a Personal if I’m Self-Employed?
Let’s start by answering this question in the simplest terms: yes, you may. But like we’ve already mentioned, it helps to have some idea of what lenders may be looking for from people in your situation.
Whether you’re self-employed or not, a lender will generally look at your credit history, your income, and a few other factors that’ll help them predict your ability to pay your loan back. But if you’re self-employed, the process of showing proof of consistent income and demonstrating your capacity to pay your loan back on time may be more difficult. If you can’t count on a W-2 form, there are still ways for you to show that you’d be a responsible borrower.[1]
What are the Requirements for a Personal Loan for the Self-Employed?
When you’re not on the payroll of an employer, it may be a little more difficult to show proof of a steady income. While the exact requirements can vary between lenders, here are some ways for you to provide the necessary information, as well as a couple of factors that may help you get approved for a personal loan for the self-employed.
1. Bank Statements
Whether you’re self-employed or not, you’re more than likely going to need to provide some sort of documentation that shows your income. The difference is in the amount of documentation.
A lender may ask to see your bank statements from the past several weeks just to make sure you’re putting enough money into your bank account to keep up with your loan payments. But because the process of approval for people who are self-employed may be a little more extensive, you may end up needing to provide more paperwork than certain other borrowers. This could mean that you’ll need to show at least a year’s worth of bank statements.
Typically, a lender will need you to show that you’re making enough money on a consistent basis in order to meet your payments. This means that if your only income is coming from a side hustle, or isn’t a substantial amount, this may not be enough to get you approved.
2. Tax Returns and Transcripts
Because you may not have W-2 forms or pay stubs from your workplace, a lender may ask to see up to a few years’ worth of your tax returns as proof of income. This means you’ll need to produce copies of your tax return transcript, which shows details like your adjusted gross income and other important financial details.[2]
3. A Minimum Credit Score
Like we’ve already mentioned, your credit score can play a big role in your ability to get approved for a loan. Depending on the financial institution and the type of loan you’re applying for, you may need to have a minimum credit score to qualify for a loan.
Your credit score won’t necessarily play a focal role in every case, as there are things like installment loans for self-employed people with bad credit. Just keep in mind that these loans may come with higher interest rates and/or lower loan limits.
4. Collateral for Secured Loans
With an unsecured loan, whether your application is approved or denied is largely based on a lot of the factors we’ve already spoken about, like your credit score and income. But with a secured loan, you’ll need to put up an asset in the form of collateral for your application to be considered. This means that if you put up your car as collateral and default on your payments, the lender can seize your car in lieu of payment.
By providing collateral, the risk that a lender takes on is minimized and you may have an easier time getting approved. On top of that, because there’s less risk for the lender, your loan may come with lower rates. Just remember that if you do end up defaulting, there’s a chance that the lender could seize a valuable asset of yours.
5. Get Approved with a Cosigner
Another way to potentially increase your chances of approval would be to apply with a cosigner. This can also be a good way of boosting your chances of getting approved for a loan when you have poor credit.
The role of a cosigner is to take as much responsibility as you when it comes to making your payments. This provides a lender with more security in ensuring the payments on your loan will be made. This can also help you negotiate better rates or a higher loan amount in certain circumstances.
Alternatives to Personal Loans if You’re Self-Employed
Like we’ve established, the process of getting approved for a personal loan when you’re self-employed can be a little arduous. So, before you go down this road, you may want to evaluate some of your other potential options. Let’s take a look at some of these.
Home Equity Line of Credit (HELOC)
If you’re a homeowner, you may have the option to use your home as collateral in order to get approved for a HELOC. This is a secured loan that lets you use the equity you have in your home to secure a line of credit. While these loans tend to have very competitive borrowing rates that are often lower than unsecured options, there’s a big element of risk involved considering you’re putting your home up as collateral.
Credit Cards
Depending on your situation, a credit card may be a viable option when you’re having a hard time getting approved for a personal loan. Just remember that it’s important to use credit cards responsibly. This means only using them when you have the money in your savings or checking account to pay off what you use. But, if used responsibly, they may help you have a positive impact on your credit history, and can help you accrue cash back dollars or air miles depending on what rewards come with that particular card.
Cash Advance
A cash advance is an advance you typically take from your credit card. If you’re in need of some quick cash for an emergency situation, this may be a potential option. Just keep in mind that the interest rates on these types of loans tend to be very high, so they should only be used as a last resort for emergencies.
Business Loans
This last option for people who are self-employed is one that only works for very specific instances. A business loan can only be used for expenses related to your business. So if you were thinking of applying for one with the intent to use your funds on personal expenses, think again.
A business loan can be a good option if you need a loan to support your business. Of course, there are still requirements to get approved for these types of loans, but they may be better suited to your situation than a personal loan.
Be Persistent in Your Search for a Personal Loan
Even with some of the obstacles you may have to face as someone who is self-employed and looking for a loan, getting approved for one may still be possible!
While requirements can vary between lenders, make sure you’re as prepared as you can be before applying for a loan. This could mean having bank statements and tax return transcripts ready to go. Try to gather as much documentation that shows proof of income as you can. It also helps to keep your credit score in a healthy place and go into the engagement with a co-signer to back you up if you can find one.
And remember, just like in any borrowing situation, you’re going to want to consult your budget to make sure you can actually afford to pay back the loan you’re applying for.
If you put in the time to research lenders, get prepared, and stay patient, you may be able to get a personal loan if you’re self-employed!
[1] https://www.investopedia.com/terms/w/w2form.asp
[2] https://www.irs.gov/individuals/transcript-types-and-ways-to-order-them
