Can you get a personal loan if you are self-employed?

If you are self-employed and short on cash, you may be eligible for credit options including personal loans. Personal loans offer a set amount of money that you repay over a set period of time, and they can be useful for borrowers looking to consolidate their debt or cover large or urgent expenses.

Before you start looking for a loan, you should know what to expect as a self-employed applicant. It’s also important to consider all of your options to make sure a personal loan is the right choice – it may not be.

“You shouldn’t be looking for a personal loan if you’re self-employed and it’s a business,” says Lori Atwood, board-certified financial planner and founder of Atwood Financial Planning and Fearless Finance. “If it’s for you, just make sure you have all the right evidence of your cash flows.”

Is it harder to get a personal loan when you’re self-employed?

Every loan applicant is different, regardless of employment status, and it’s not necessarily harder for the self-employed to get a loan.

“Whether you’re self-employed or employed, going through the underwriting process will always be a balancing act,” said Brian Walsh, CFP and senior manager of financial planning at SoFi. For example, borrowers with high incomes relative to their debt payments may not need as strong a credit rating, Walsh says.

However, if you are new to self-employment, you will not easily be able to prove that your income is constant. This can make borrowing more difficult.

“They may also still qualify because lenders take into account their credit history, their education, their free cash flow, maybe their financial and payment history and things like that,” says Walsh. “But it gets even harder when they’ve only been doing this for, say, a year.”

Adding a co-signer can make it possible to get credit if you’re new to the business. “That co-signer would need to be either independently wealthy, which for young people can sometimes be a parent or grandparent who can do that,” Atwood says, “or if it’s a spouse or friend.” That person needs to have a W-2 job where they know money is coming in.”

How can you prove your income if you are self-employed?

While self-employed borrowers cannot provide the same documentation as other workers, they should still be able to provide satisfactory proof of income when applying for a personal loan.

“Anytime a self-employed person goes through the credit process, they should expect to provide additional documentation, which I as W-2 staff would not deliver,” says Walsh. “This could be documentation related to your income, such as B. the tax returns of the last few years. It can even be documents like financial statements or bank statements that show that the inflows are indeed coming in on a consistent recurring basis.”

Again, getting a loan can be harder if you’re new to self-employment — you may not have tax returns that reflect income and expenses, or bank statements that show consistent cash flow. However, if you work in a similar industry, it might be easier to make your case.

For example, an experienced plumber who recently went into business for himself as a plumber would have a more predictable income than an experienced plumber who decides to run a restaurant, says Ryan Olson, vice president of consumer credit at Florida’s Community First Credit Union. “We also look at previous jobs. Are they similar or similar industries, and have they stayed in similar industries to migrate to this new level of self-employment?”

Should you get a personal loan if you’re self-employed?

Personal loans can be a helpful tool for borrowers looking to consolidate higher-interest debt. They’re also typically unsecured, meaning you don’t have to pledge collateral like a car or house to get financing.

If you already have personal credit card debt to fund your business, it may make sense to get a personal loan with a lower interest rate. “But if someone came to me with a business idea, they shouldn’t be looking for personal loans and shouldn’t personally fund it,” says Atwood.

Debt can also make it harder for self-employed people to manage their cash flow. “Probably the biggest challenge I see working with freelancers is managing cash flow,” says Walsh. “And often when they’re managing cash flow, it’s quite critical to keep the debt under control as much as possible.”

Before you take out a personal loan, make sure you really need the money. “Unless you absolutely need it, you probably shouldn’t borrow money for it,” says Walsh.

Remember that in order to get a low interest rate on a personal loan, you need a strong credit history. You can also consider different types of lenders, including online lenders and peer-to-peer lenders. Pre-qualifying with multiple lenders can help you find the best option.

What are other ways to get financing if you’re self-employed?

Personal loans can be useful for some consumers, but they’re not always the right choice. Depending on your financial situation and what you intend to do with the loan funds, you might also consider the following options:

  • business loans. If you want to finance your business, you can consider small business loans. Options include term loans and equipment loans.
  • equity financing. If you’re starting a business that has no cash flow for years, or possibly none at all, Atwood recommends considering selling equity capital. In this scenario, you sell part of the ownership of your business.
  • Home equity loans or cash out refinances. If you own a home and have equity, you can use any of these tools to access cash. Developing home equity is a particularly attractive option with interest rates currently low, Walsh says.
  • Credit cards with 0% APR. If you’re considering a personal loan to consolidate credit card debt, you might want to consider that as well Credit cards with 0% APR, which generally do not charge interest on balances between 12 and 21 months. You can transfer existing balances to the card, but be sure to plan to clear your debt before the end of the introductory period. Otherwise your debt will start earning interest again.
  • Secured Personal Loans. Personal loans are typically unsecured, but lenders also offer secured options. In this case, borrowers put up collateral like a car or boat that they could lose if they don’t repay the loan. In return, borrowers can get lower interest rates. “Your unsecured loans have higher interest rates…than your typical secured loans, which of course all depend on creditworthiness,” says Olson.

Overall, when deciding on a personal loan, you should consider what you want to use the money for. “I can’t stress enough that the person needs to match the funding to the cause they’re trying to fund,” says Atwood.

About Meredith Campagna

Check Also

Fast Cash Advance: Risk-free financing method for everything

Financial emergencies are unpredictable; and they have their ups and downs. However, you can meet …