Your employment status has a major impact on your loan application. Lenders often prefer borrowers with proof of employment and a steady income, over self-employed borrowers with fluctuating income. As difficult as it may get to find a loan when you’re self-employed, it’s not impossible. In this article, we will discuss how self-employed people can get personal loans approved. ⭐Personal Finance ⭐Money Management ⭐Personal Loans
The Coronavirus pandemic took the global economy by a storm. Nations across the globe are having a hard time coping with this financial hit. While the UK government is encouraging financial institutions to approve a greater volume of loans, not a lot of people can avail them. Considering the financial crisis, banks and lenders have become all the more stringent with their lending criteria.
Getting a loan is difficult as it is if you’re self-employed. But as lending institutions are now pickier than ever about who they lend money to, getting a personal loan has become tougher for the self-employed. Lenders are trying to minimize the chances of default, so they would ideally avoid an applicant with fluctuating income. So the question arises – Is it possible to get a personal loan if you’re self-employed?
In this article, we will understand if self-employed people are eligible for personal loans.
Can I get a loan while I’m unemployed?
Yes, you can get a personal loan even if you’re self-employed. Although, your options may be limited. However, if you can prove your creditworthiness with a decent credit history and fulfill the lender’s pre-requisites, you may find yourself fair loan offers.
Many lenders provide loans to freelancers and self-employed people, in need of financial help to bridge some gaps. As long as you demonstrate responsible credit behavior, lenders may consider your profile even if you’re self-employed.
What types of loans can I get?
As a self-employed individual, your loan options may be limited but there are several types of loans that you can apply for:
- Unsecured Personal Loan: An unsecured personal loan is one wherein you don’t have to declare an asset as security against the loan. If you’ve exhibited good credit behavior in the past, you might get loan offers with affordable interest rates. Unsecured loans may be cheaper than it’s counterparts. Some lenders offer fixed interest rates on unsecured personal loans. However, some lenders set a minimum loan amount, so you may end up borrowing more money than you need or can afford.
- Secured Personal Loans: Sometimes, you can’t provide substantial credit history to a lender. For such cases, a secured personal can prove to be a great option. A secured loan is a personal loan wherein you declare the equity in your house as an asset against the loan. Because this loan uses security, the interest rate offered on these loans is relatively lower. So if you are a freelancer based out of your residence, seeking a loan, you might want to opt for a secured loan.
- Guarantor Loans: Suppose you’re not eligible for a loan by yourself, based on your credit history. In such a case, you can get a friend or a family member with a good credit report, to become your guarantor. Now if you default on your repayments, the lender can summon your guarantor to repay the loan on your behalf. Until the loan term is over, the guarantor and the borrower are equally responsible for the loan’s repayments.
- Business Loans: You can apply for this loan if you need some financial backing for your business. The lender will check your business accounts to assess your creditworthiness.
Am I eligible for a personal loan?
Anybody above the age of 18, who satisfies the following pre-requisites, is eligible for a loan in the UK:
- Be a legal UK resident, with a valid proof of address
- Provide proof of your income to show the lender that you’re capable of repaying the loan
- Qualify a proper credit check
How to apply for a personal loan?
Applying for a personal loan when you’re self-employed is the same as applying for any other loan. Take a look at the steps below:
- Sort out your financial documents: As someone self-employed, it is imperative to maintain a record of all your financial documents handy. Lenders will use this information to assess your application.
- Check your eligibility: Most lenders offer the facility to soft-check your eligibility for a loan, without affecting your credit score. This will allow you to narrow down the loans you are eligible for and save you from applying for a loan you wouldn’t be approved for.
- Shop around: It’s always important to compare loans from different lenders to find the best deal that suits your needs and your affordability.
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Depending on which lender you choose, you will need the following documents to apply for a personal loan if you’re self-employed:
- Proof of ID: You can use your driver’s license or your passport.
- Proof of address: You could provide copies of Council Tax or utility bills like gas or electricity bills.
- Tax returns (SA302): Being self-employed, you are required to self-file, so once you’ve submitted your tax returns, you can simply log into your HMRC account and download your SA302 calculation. You should be able to provide copies of your SA302 calculation of at least the previous two years to help prove the income that you declare in your application.
- Bank statements: The lender will ask for your bank statements to validate the earnings shown in your SA302 calculation, and get a holistic picture financial position (regular income and pattern of outgoings).
- Proof of any rental income: This should be declared and evidence provided, again through your bank statements or mortgage documents and statements, and you may need to produce any lease/tenancy agreements.
- Company/business information: This includes the status of your business (sole trader, partnership, limited company, etc), and details of anyone other than yourself with a financial interest in the business.
If you’re self-employed, chances are that you’ve faced a tough time getting a loan. Lenders often prefer employed people, with a valid proof of income, over someone self-employed, with a variable income. While your options may be scanty, but it’s not impossible to get approval for a personal loan while being self-employed.
However, it is important to assess the available options carefully. The end goal is to save your finances, so compare the APRs of all your loan offers before shortlisting one.
Your lender will also inquire about the purpose of your loan as part of your application. Be honest so the lender can tell you if you can use the money for its intended purpose.