The Coronavirus pandemic brought about chaos in the global economy, to the extent that nations are still struggling to recover from the downward spiral, after more than a year. The pandemic has gravely affected the livelihood of many big and small business owners, as well as salaried employees.
As people cope with the aftermath of the pandemic, the government is urging banks to free up more credit to help the self-employed sustain their businesses. However, banks and lenders have restricted their lending criteria so as to minimize their risk proposition, making it tougher for the self-employed to access credit.
The credit score is one of the most salient factors in your loan application since it helps the lenders assess your repayment capability. Another key aspect is your income, which gives the lender an idea of your affordability. This gap is what holds back the self-employed, for most of them the monthly income is variable.
So how does one go about borrowing self-employed loans? Scroll down to learn more!
Can I apply for self-employed loans?
You can certainly apply for loans even if you’re a business owner. Although, the loan options available for the self-employed are limited. In such cases, you should focus on fulfilling the lender’s criteria to qualify for the loan.
Several lenders lend to freelancers and business owners seeking funds to bridge some financial gaps. So long as your credit history is strong, the lender may consider you even if you’re self-employed.
Your credit score gives the lender insight into your relationship with credit. A good credit score shows how responsible behaviour you’ve been with credit. Having a good credit history and a source of income can strengthen your application since these factors help the lender determine your creditworthiness and affordability.
With a weighty application, you are likely to qualify for a higher loan amount at competitive rates for a longer tenure. But, it is in your best interest to only borrow an amount that you can afford to repay. If you borrow based on your eligibility rather than your need, you may end up falling into a debt spiral.
Personal loan for self-employed – Will they be costly for me?
Personal loans are not earmarked for a specific purpose. You can certainly apply for a personal loan despite being self-employed. Moreover, unsecured personal loans don’t require collateral security. A solid application helps you qualify for better rates.
What type of online loan for self-employed people can I apply for?
Here are some loan options for you to consider if you’re self-employed:
- Personal loans: Unsecured personal loans are a great way to spread the cost of your purchase into fixed monthly instalments over a period without securing collateral. Personal loans are suitable for self-employed people with good credit score seeking urgent financial aid. While someone with poor credit can avail of a personal loan, they may not qualify for competitive interest rates. Carefully compare your loan options in terms of interest rates and APRs before choosing one. Missed repayments or defaults can gravely impact your credit score, hampering your chances of securing any other credit in the future. So, ensure that you make timely repayments each month until the loan is paid off.
- Secured loans: Secured loans may be a good option for people who have an asset to offer as collateral. Most people use their property or home equity to secure this loan. Now, if you fail to keep up with repayments, the lender will most likely recover the money by selling your property. You can consider this option if you can’t present a substantial employment history or documented income. While secured loans have lower interest rates than other credit products, there is a high risk for the borrower. Weigh the pros and cons of this option before taking your call.
- Guarantor loans: If you have a below-average credit score, your lender may ask you to present a guarantor. A guarantor is a close friend or family member willing to partake in the loan’s obligations with you. Now, if you were to default, the onus of the loan’s repayments will fall on your guarantor. Most lenders accept guarantors with a strong credit history and regular income to minimize the risk of default. If you’re sure of your ability to repay the loan, having a guarantor by your side can improve your chance of securing credit. But, bear in mind that these loans have higher interest rates than personal loans.
- Business loans: Business loans can help you finance urgent business expenses or regulate the company’s financial flux. For a business loan, lenders would generally require details of your business accounts.
Self-employed loans, no credit check – myth buster
Normally, FCA-authorized lenders would run a hard credit check on you when you apply for credit. If a lender agrees to lend you money without a credit check, there’s a high chance that they will offer you an excessive rate of interest. So, beware of such lenders.
What documents do I need to apply for online loans for self-employed?
A lender would generally require the following documents to assess your online loan application:
- Proof of identity: A driver’s license or a passport can serve as identity proof.
- Residence proof: A copy of your utility bills or council tax papers that contain your current address can be submitted as proof of residence.
- Tax Returns (SA302): If you’re self-employed, the chances are that you self-file your tax returns. Log into the HMRC website to download your SA301 for the previous 2 years. You can use this to declare your income.
- Bank statement: Lenders use your bank statements to match the earning mentioned in your SA302. Bank statements also give a general insight into your financial standing over some time.
- Proof of rental income (if any): If you have let a property on rent, you are required to declare this income. You can produce bank statements, a signed lease and mortgage documents to prove tenancy.
- Details about your business: The lender would want to understand the nature and status of your business. You should also mention if someone co-owns the business with you, with a financial interest in the business.
Getting a loan can be difficult if you’re self-employed, but if you work on your credit habits, you can increase your likelihood of qualifying for credit, even with scanty options. Remember to compare your options before making the final call.