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Personal Loans For The Self-Employed: How To Apply

6-Minute ReadFebruary 08, 2022

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Getting any kind of loan usually requires showing proof of income so lenders feel assured a borrower has a steady salary that can keep them making their monthly payments on time. If a borrower is self-employed and makes an irregular income, it can be difficult to prove they can take on a loan.

This article will show how a self-employed person can show their proof of income, and addresses other difficulties of getting a loan when you’re self-employed.

How To Get A Personal Loan If You’re Self-Employed

A personal loan can be used for almost anything, including small-business expenses. Since a self-employed person may not make as conventional of an income as someone on a company salary, being self-employed means a few additional steps may be required to qualify for a loan.

Self-Employed Loan Requirements

Getting a personal loan might require you to gather more information than those who aren't self-employed.

First, it's important that you can show sufficient, stable income from self-employment. It's OK if you have some slight fluctuations in your income now and then, but lenders ultimately look for an ongoing, upward trend. Lenders also want to see that an applicant has a good credit score and a history of repaying debts. They’ll also look at the type, age, limits, use and status of existing accounts. Additionally, lenders may also look at how often an applicant has applied for new credit within the past year.

Next, lenders want to see that a loan applicant has steady work and has been self-employed in the same industry for at least 2 years. It can be possible for an applicant with 1 year of experience to be approved for a loan if they present additional information. However, having a shorter history of employment indicates risk to lenders.

Lenders may also look to see if an applicant has cash reserves, or an emergency fund that can be used to pay bills during months when income might be lower.

Showing Proof Of Income When Self Employed

Proof of income is a very important part of the loan approval process. If you're self-employed, here are ways you can show proof of income:

  • Pay stubs: Pay stubs include an applicant's full name, employer's name and contact information. They’re used to show lenders a past and current profile of an applicant's income.
  • Tax statements: Your tax statement from the previous year (1099) contains your wages and taxes. Because tax statements are legal documents, many lenders see them as the most reliable proof of income for self-employed individuals.
  • Bank statements: If an applicant has a history of regular deposits, bank statements can show a stable flow of income. Just make sure to keep your business expenses separate from your personal ones.
  • Profit and loss statements: A profit and loss statement (or ledger documentation) is a summary of your costs, expenses and revenues. This can show a lender more about your income.
  • Social Security benefits statements: A Social Security benefits statement shows an applicant the benefits they will receive when they retire. You can access your statement through the Social Security Administration.
  • Court-ordered agreements: Examples of court-ordered agreements can include alimony or child support. You can request a copy of these agreements from the court.

Consider Having A Co-Signer

If you’re struggling to qualify for a personal loan even with your proof of income, consider having a co-signer for your loan. Having a friend or family member with strong credit and low debt-to-income (DTI) ratio co-sign on the loan with you can strengthen your application in the eyes of a lender, as they’ll consider the co-signer’s income too.

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Why It’s Difficult For The Self-Employed To Get A Personal Loan

Even if an applicant can show proof of income to a lender, self-employed borrowers can still face challenges when applying for a personal loan.

The Income Challenge

Self-employed borrowers always face the same hurdle when applying for a personal loan: They claim too much of their earnings as business expenses on their income taxes.

This helps when it's time to pay taxes. By claiming more expenses on their tax returns, self-employed borrowers reduce their taxable income. But lenders must base their lending decisions on the final income that borrowers report on their taxes. Often, this income is so low that borrowers struggle to qualify for a personal loan or mortgage.

Say your business earns $100,000 in revenue in a given year. When it's time to pay your taxes, you claim $50,000 worth of business expenses. This reduces your taxable income, the income you report to the Internal Revenue Service (IRS), to $50,000, leaving you with a far smaller tax bill.

However, when you apply for a personal loan, lenders won't make their decision to approve you based on the $100,000 your business earned. Instead, they'll look at your final income figure of $50,000. This can then make it difficult to earn approval for a larger loan amount.

Consistency Matters

Morgan Taylor, finance expert and chief marketing officer for Scottsdale, Arizona-based LetMeBank, says self-employed borrowers will need to prove that their income is consistent from year to year. Lenders don't want to see that in 1 year you've earned $40,000 and the next $120,000. They may worry that while you'll be able to make your payments during the up years, you won't during any down years your business might experience.

"In the end, lenders want to know you're able to pay on the loan," Taylor says. "This means that regardless of what you're doing, lenders want to know that it is long-term and consistent. It's great if you get $10,000 this month. But if that drops down to nothing for the next 5 months, that's not very reliable, is it?"

If you can provide lenders with several years' worth of tax returns all showing that your self-employment income is steady, the better your odds of qualifying for a personal loan.

Personal Loan Alternatives When Self-Employed

If for any reason you’re unable to get or decide against a personal loan, there are a few other loan options that may suit your needs.

Credit Cards With 0% APR Promotions

Credit cards can loan you money when you need it, but their repayments can come with high interest rates. Some card issuers may offer a 0% APR promotional period when you sign up for a new card, which can give you 12 – 18 months of interest-free repayments. You should be confident you can repay your full balance before the promotional period ends, though.

Cash Advances

Having a credit card will allow you to take out a short-term loan, or cash advance. Cash advances are useful for situations where you need cash in hand and can't just swipe your card. But be on the lookout because the APR for a cash advance can be higher than the APR for regular purchases.

Home Equity Loans Or HELOCs

If you own a home, you might be able to borrow from the equity in your home through a home equity loan or a home equity line of credit (HELOC). A home equity loan has a fixed term and gives borrowers the money in one lump sum. On the other hand, a HELOC lets borrowers make payments only on the amount borrowed.

Business Loans

A business loan is strictly intended for business purposes and can be used by self-employed individuals. Business loans are useful for individuals who are self-employed because it can help them separate business and personal expenses. With that being said, business loans are not flexible and can only be used for business purposes.

FAQs About Loans For Self-Employed Borrowers

Can you get any loans if you’re self-employed with no proof of income?

Proof of income is an important indicator of a borrower’s creditworthiness, so there are, unfortunately, few loan options available to an applicant who can’t provide records of their income. Pawn shop loans may allow you to exchange a valuable item as collateral for the lender to keep until you can repay the loan in place of proof of income, but then you risk losing that item if you can’t pay the loan back.

Are there any loans for self-employed people with bad credit?

Having good credit can qualify you for the best rates and terms for personal and other types of loans. Payday loans can loan you money without a credit check, but their fees and interest rates can cost you more in the long run. You’re better off taking steps to improve your credit so that you can qualify for better rates.

Can self-employed freelance workers get personal loans?

Freelance workers can qualify for a personal loan if they can provide proof of income, as well as a certificate of employment from their current client, if possible.

Final Thoughts

Even if you are self-employed, you can still qualify for a personal loan. The key is to show lenders that your income stream is steady each year. This will give lenders confidence that you'll be able to make your payments on time each month.

If you want to know what rates and terms you can qualify for, apply online today for a prequalification from Rocket Loans℠.

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