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Personal Loans For The Self-Employed: How To Apply

Hanna Kielar7-Minute Read
February 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 for them to prove they’re ready to take on a loan.

Let’s take a look at how a self-employed person can show their proof of income and confront potential roadblocks that might impede their ability to secure a personal loan.

How To Get A Personal Loan When 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 an income as conventional as that of 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 okay if you have some slight fluctuations in your income every now and then, but lenders ultimately look for an ongoing, upward trend.

Lenders want to see that an applicant has a good credit score and a history of repaying debts. They’ll look at the type, age, limits, use and status of existing credit accounts. Additionally, lenders may take note of how often an applicant has applied for new credit within the past year.

Lenders may also 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’s possible for an applicant with 1 year of experience to be approved for a loan if they present enough information. However, lenders can deem someone with a shorter history of employment as a financial risk. Lenders might look to see if an applicant has cash reserves or an emergency fund that they could use to pay bills in 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 some acceptable proofs of income:

  • Tax statements: Since you most likely don’t have pay stubs or W-2s from an employer, you’ll have to use a tax statement from the previous year (1099) to prove 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.
  • Tax returns: Your lender could also ask to see your previous federal tax returns, such as a Schedule C or Schedule SE, to help verify your income.
  • Bank account 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. Be sure to ask your lender whether these documents are required.
  • Social Security benefits statements: A Social Security benefits statement shows an applicant the benefits they’ll 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 a co-signer for your loan. Having a friend or family member with strong credit and a low debt-to-income ratio (DTI) co-sign the loan with you can strengthen your application in the eyes of a lender since they’ll consider the co-signer’s income, too.

Rocket LoansSM doesn’t currently offer the option to co-sign on loans.

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

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

The Income Challenge

Many self-employed borrowers often 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.

Let’s 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, making it difficult for you to earn approval for a larger loan amount.

Consistency Matters

Finance expert Morgan Taylor – 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 you’ve earned $40,000 in 1 year and $120,000 in the next. 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.

Self-Employed Personal Loan Alternatives

If, for any reason, you’re unable to get or decide against a personal loan, some other loan options may suit your needs. Let’s take a look at a few of them.

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 offer a 0% APR promotional period when you sign up for a new card, giving 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

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 house, you might be able to borrow from the equity you’ve built through a home equity loan or a home equity line of credit (HELOC). A home equity loan has a fixed loan 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 business owners. A business loan is useful for those who are self-employed because it can help them separate business and personal expenses. That said, business loans aren’t flexible and can’t be used to fund personal projects such as a home renovation or wedding.

If you need a small amount of money to cover an unexpected business cost, you might be able to get an SBA microloan with a local bank, or perhaps you can qualify for a small-business loan with an online lender. Both of these options come with relatively flexible eligibility requirements, so you might have an easier time securing approval.

FAQs About Loans For Self-Employed Borrowers

While finding a personal loan as a self-employed individual might seem challenging, doing thorough research and ensuring you have enough documentation can help you find a loan program that works for your situation.

Use these frequently asked questions to learn more about personal loans for the self-employed.

Can I get any loans if I’m self-employed, with no proof of income?

Proof of income is an important indicator of a borrower’s creditworthiness, so few loan options are 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 loans and other types of loans. Payday loan lenders won’t look at your credit history, 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 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: Getting A Loan As A Self-Employed Worker Can Present Challenges, But It’s Doable

Even if you’re 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 the rates and terms you can qualify for, apply online today for a prequalification from Rocket Loans.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.