Can you get a personal loan when you are self-employed?
If you are self-employed and are short on cash, you may be eligible for borrowing options, including personal loans. Personal loans provide a fixed amount of money that you repay over a set period of time, and they can be useful for borrowers looking to consolidate debt or cover a large or urgent expense.
Before looking for a loan, you should know what to expect as an independent candidate. 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 for business,” says Lori Atwood, Certified Financial Planner and founder of Atwood Financial Planning and Fearless Finance. “If this is for you, just make sure you have full proof of your cash flow.”
Is it more difficult to obtain a personal loan if you are self-employed?
Every loan applicant is different, regardless of employment status, and getting a loan won’t necessarily be more difficult for self-employed applicants.
“Whether you’re self-employed or employed, the underwriting process will always be a balancing act,” says Brian Walsh, CFP and senior director of financial planning at SoFi. For example, borrowers with high income relative to debt repayments may not need such strong credit scores, Walsh says.
If you’re new to self-employment, however, you won’t be able to easily prove that your income is consistent. This can make it harder to get a loan.
“They may also be able to qualify because lenders will consider their credit score, their education, their free cash flow, maybe their financial and payment history, stuff like that,” Walsh says. “But it’s going to make it even more difficult if they’ve only been doing this for, say, a year.”
Adding a co-signer can help you get a loan if you haven’t been in business for a long time. “That co-signer should either be independently wealthy, which for young people sometimes has a parent or grandparent who can do that,” Atwood says, “or if it’s a spouse or friend. That person must have a W-2 job where they know there’s dough coming in.”
How can you prove your income when you are self-employed?
Although self-employed borrowers cannot provide all of the same documents as other workers, they should still be able to provide satisfactory proof of income when applying for a personal loan.
“Each time a self-employed person goes through the loan process, they should expect to provide additional documentation than myself as Employee W-2 wouldn’t provide,” Walsh says. “It could be documentation related to your income, like the last two years of tax returns. It can even be documents such as financial statements or bank statements that show capital inflows that actually happen on a recurring basis.”
Again, it may be harder to get a loan if you’re new to self-employment – you may not have tax returns that reflect income and expenses or bank statements that show a flow. constant cash flow. But if you work in a similar industry, it may be easier to make your point.
For example, an experienced plumber who recently became self-employed 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 loans at Community First Credit Union in Florida. “We also look at past jobs. Are they similar or similar industries, and have they stayed in those similar industries, somehow migrating to this new level of self-employment?”
Should you take out a personal loan when you are self-employed?
Personal loans can be a useful tool for borrowers looking to consolidate higher interest rate debt. They’re usually unsecured, which means you won’t have to pledge a car or house to get financing.
If you’ve ever incurred personal credit card debt to fund your business, it may be a good idea to get a personal loan at a lower interest rate. “But if someone came to me with a business idea, they shouldn’t be looking for personal loans and they shouldn’t be funding it personally,” Atwood said.
Debt can also make it harder for the self-employed to manage their cash flow. “Probably the biggest challenge I would see working with freelancers is managing cash flow,” Walsh says. “And a lot of times when they’re managing cash flow, controlling debt as much as possible ends up being pretty critical.”
Before taking 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.
Keep in mind that you will need a strong credit score to get a low interest rate on a personal loan. You can also consider different types of lenders, including online lenders and peer-to-peer lenders. Prequalifying with multiple lenders can help you find the best option.
What are the other ways to obtain financing when you are self-employed?
Personal loans can be useful for some consumers, but they are not always the right choice. Depending on your financial situation and what you plan to do with the loan funds, you may also want to consider options such as:
- Business loans. If you are looking 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 won’t have cash flow for years, if at all, Atwood recommends thinking about selling some equity. In this scenario, you are selling part of your business ownership.
- Home equity loans or cash refinances. If you own a home and have equity, you can use one of these tools to access money. Tapping into home equity is a particularly attractive option with the low interest rates currently available, Walsh says.
- 0% APR Credit Cards. If you are considering a personal loan to consolidate your credit card debt, you can also consult 0% APR Credit Cards, which generally charge no interest on balances between 12 and 21 months. You can transfer existing balances to the card, but be sure to plan to pay off your debt before the end of the introductory period. Otherwise, your debt will start earning interest again.
- Secured personal loans. Personal loans are usually unsecured, but lenders also offer secured options. In this case, borrowers put up collateral, such as a car or boat, that they could lose if they don’t repay the loan. In exchange, borrowers can obtain lower rates. “Your unsecured loans have higher rates…than your typical secured loans, obviously it all depends on credit,” Olson says.
Overall, you need to think about what you want the money to be used for when you decide to take out a personal loan. “I can’t stress enough that the person has to match the funding with what they’re trying to fund,” Atwood says.