There are lots of advantages and disadvantages to being self-employed and, here at 786 Loans, we’ve noticed that we get a lot of questions from the self-employed asking about how loans for self-employed people actually work for them. It’s an area shrouded in some mystery and misunderstanding so, in this article, the 786 Loans team examine:
• what self-employment actually means to a lender,
• whether self-employed people with bad credit can get loans and why,
• the types of loans available to the self-employed,
• special protections legally enforced on bad credit self-employed loans, and
• why using a broker like 786 Loans can save you time, money, and heartache.
What does self-employed mean?
In the UK, millions of people fill in a self-assessment form to report to the taxman what they’ve earned between 6th April one year and the 5th April the next year. We nearly all associate being required to fill in a self-assessment form with being self-employed but that’s not always the case.
You will need to fill in a self-assessment form if you are an employee and if:
• you ‘side hustle’ and turnover more than £1,000 a year as either a sole trader or as a partner in an unincorporated partnership
• you rent out property and earn money from it
• you earn commission and tips which are not reflected on your payslip
• you derive income from dividends, investments, or savings
• you earn money from abroad
If the majority of your income comes from your job, most loan companies will consider you as an employed person with one or more additional sources of revenue.
If the majority of your income comes from these additional sources of income, most (but not all) lenders will consider your employment status as “self-employed” when applying for finance through them.
There are nearly 4.5 million self-employed people in the UK, the majority of whose income comes from their self-employed activities. If you own and run a limited company and you appoint yourself as a director, you are defined for tax purposes as an “employee”. However, for most lenders, they will consider you self-employed.
Can self-employed people with bad credit get loans?
Yes. As we’ve just mentioned, there are 4.5 million self-employed people in the UK and that’s too big a market for any lender not to want to be a part of.
Added to that, being self-employed can be lucrative. Let’s look at contractors – one of the fastest growing parts of the UK employment market. According to the Office of National Statistics and as reported by BM Magazine, full-time IT employees earn £44,695 a year – a great wage. 40% of IT contractors charge more than £500 a day and that means that, if they were to work 5 days a week for 18 weeks, they’d earn the same as a full-time IT employee. Contractors and the self-employed can further reduce their tax bills by claiming against expenses and by setting up limited companies with their spouses or civil partners.
The French have often called the British a “nation of shopkeepers”. We’re now a “nation of professionals” charging our services out at retail rate direct to the customer rather than charging our time out at wholesale rates through an employer.
Perhaps the biggest difference between being employed and self-employed is variability of income. Whereas a full-time employee will be guaranteed to receive their salary at the end of every week or every month, a self-employed person’s income will often move up and down month by month because of the amount of work they do and because of how quickly customers pay them.
And it’s because of this variability of income, particularly in the first year or two after someone commits to being self-employed, that people often fall behind on credit card, mortgage, and loan repayments as well as payments to their mobile phone company and to their utilities company. It’s when this happens that the wrong type of information can start appearing on your credit score which, in the past, could affect whether you would be successful when applying for a loan and, if you were, what you would pay.
What types of self-employed loans are available in the UK?
There are two main types of unsecured loans available to the self-employed – self-employed guarantor loans and self-employed loans with no guarantor.
With self-employed guarantor loans, you must nominate someone who promises to pay back the loan you want to take out if you fall on hard times and if you’re unable to repay the loan. A guarantor will normally be a friend or a family member. Self-employed guarantor loans have come in for a lot of criticism lately because of the number of guarantors being forced to step in to make payments against loans (source: BusinessCloud).
Here at 786 Loans, we think it’s unfair that guarantors are being forced to pay off loans from which they have derived no personal financial benefit. That’s why we’d always recommend that, if you have to take a loan out, you consider taking out a self-employed loan with no guarantor instead.
Self-employed loans with no guarantor for bad credit applicants can either be:
• self-employed payday loans (where you pay off the amount you borrow and the interest in one repayment) for between £50 and £1,000, or
• self-employed short-term instalment loans (where you pay off the amount you borrow plus the interest in up to 12 repayments, one repayment per month generally for the same amount) for £200 to £2,500.
Special protection on bad credit self-employed short-term loans
Self-employed payday loans and self-employed short-term instalment loans belong to a type of finance product called high-cost short term credit (HCSTC). HCSTC provides the self-employed with additional layers of protection over and above standard consumer credit laws including:
• a cap on the interest rate chargeable of 0.8% per day (that’s 80p a day interest on every £100 borrowed)
• a cap on any fees of £15 for missing a repayment
• a HCSTC lender can not attempt to take a repayment more than twice from your account
• when added together, the total value of the interest and the charges you pay will never be more than the amount of money you took out in the first place.
Using a broker like 786 Loans to get a bad credit self-employed loan
786 Loans is not a lender – we’re a broker. And on our lending panel are dozens of lenders who are happy to work with self-employed people. What we’re here to do is to connect you with the right lender – the one who understands you the most and who charges you the least for the money you need.
The process only takes a few minutes so please click here to get started.