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Can I Get a Loan If I’m Self Employed?
If you’re self-employed, you might worry that you won’t be able to get a loan. There are so many loans out there, but if you’re self-employed, it can feel like there’s precious little assistance when it comes to finding the right loan for you. The simple fact of the matter is that yes, you can get a loan if you’re self-employed. Getting a loan if self-employed can differ from getting a loan while employed, however, so you must be aware of a few things before starting your journey to finding the perfect loan.
What Different Types of Loan Are There?
There are many different types of loans available, but for the most part, they generally fall into one of two categories – namely secured and unsecured loans. As the name implies, an unsecured loan is a loan that is not secured on anything concrete. Instead, a lender will examine your financial history and use that to determine your likelihood of paying back the loan. If you have a good credit rating and no black marks on your financial history, they have no reason not to lend to you. However, if they find out you have had issues before, such as not paying back loans or having financial judgements made against you, they may consider you a too high risk to lend to.
A secured loan is a loan that is taken out “against” something. It’ll usually be a piece of property that you own, like a car, a piece of jewellery, or even your house. The idea is that you get yourself an independent appraisal of that item’s value, and you put it up as collateral. You can then take out a loan up to the value of that item, with the understanding that if you don’t pay back the loan, it will be repossessed. The benefit of a secured loan is that you will generally not be penalised if you have a poor credit history. The reason is that if you’re borrowing against a physical item, the lender knows they can always take that to get back the value of the loan.
There is a third option, which is a guarantor loan. This is basically a kind of secured loan, but instead of lending against the value of an item, you’re lending against the promise made by a nominated guarantor. The guarantor is someone who agrees to assume partial responsibility for the debt’s repayments. So if they have a good financial history and you don’t, you can use them to get approved for your loan. It’s important to understand the ramifications of that, however, for both you and your guarantor. If you do not make your repayments, the guarantor will be held responsible and chased for the money as well as you, and their credit could be damaged.
The Difference Between Personal and Business Loans
If you’re self-employed, you might be thinking about getting a business loan or a personal loan. Loans are established with specific purposes in mind, so it’s important you know which will be best for your requirements before applying.
Personal loans are one of the most flexible kinds of loans that you can get. Pretty much every lender will offer a certain type of personal loan, which you can use for several different purposes. Unfortunately, this means it’s hard to get a baseline for interest rates, borrowing limits, and repayment terms because there’s so much variation in what you can get. That’s why it pays to shop around.
Generally, personal loans won’t be secured against anything, so you won’t need to worry about owning your own home or vehicle. But this means the success of your application will depend on you having a good enough credit history. If, during the course of your financial check, they discover you have had previous financial difficulties, it may make your application unsuccessful.
Personal loans can be used for many different things, from paying for home improvements to covering a large unexpected bill you’ve had. But it’s important to note that most lenders place a clear distinction between using a loan for personal or business reasons. So check the terms of the loan you’re applying for, and if you’re unsure about it, ask the lender before you apply.
Business loans, just like personal loans, come in many types. You can get a start-up loan specifically designed to give you some more start-up capital to get your new business off the ground. There are also general business loans, which can be used to buy yourself a new business vehicle or upgrade your IT infrastructure or invest in new tools. Many lenders also offer expansion loans designed to give you the cash boost needed to expand your business, but the criteria will be strict.
If you need a loan, it’s important to distinguish between your business and personal finances. For the most part, as a self-employed person, it makes sense to have a dedicated business bank account and a business credit card. This is because when you apply for a business loan, your business credit score will be taken into your account, along with your personal one, when the application is being checked.
Does Being Self-employed Matter?
If you’re looking for a loan and you’re self-employed, you might find it a little difficult to get your foot in the door with some companies. This is because, as we have already established, most loans are awarded based on nothing more than the likelihood of the applicant paying it back. Therefore, if you’re self-employed, there might be a perceived risk that your financial future is reasonably uncertain.
A lender ideally wants to know exactly how much money you have coming in on a weekly or monthly basis. This is fairly simple if you’re paid a consistent wage or salary. The difficulty with being self-employed, however, is that your income can fluctuate. So you may have a good month, followed by a mediocre month, which can add a level of doubt in the lender’s mind checking your application.
There are, however, ways that you can give yourself the best possible chance when it comes to getting a self-employed loan.
What Do You Need to Do?
If you want a loan and you’re self-employed, you will need to do some homework before making your application. However, a little bit of preparation ahead of time can actually save you a great deal of time and stress by making sure you only apply when you’re ready to.
1. Find the Right Kind of Loan
The first thing to do is find the loan that suits your purposes. For example, are you taking out a personal loan, and do you happen to be self-employed? Or are you taking out a short term loan that is specifically going to be used in aid of your business? You must check that first before you make your application to a lender. Next, check the loan terms to see if your purpose is covered and if you’re not sure, ask them directly.
2. Check the Loan Requirements
Lenders will make it clear what the requirements for each loan they offer are before you apply. If you are excluded from applying as a self-employed person, most lenders will make it obvious in the small print before you actually apply. Even if you are excluded from taking out one kind of loan, it’s worth persevering and checking if the lender offers another kind of suitable loan specifically designed for the self-employed. Self-employed people make up a large portion of the workforce, so most lenders will do what they can to accommodate them with their loans.
3. Get Your Financial History in Order
You will almost certainly undergo some form of a financial check before you have your loan approved. Therefore, it’s worth checking yourself first to make sure there are no black marks against your name. This could be things like unpaid debts, arrears, overdraft charges, outstanding finance, child support, unpaid tax, and a host of other factors. It’s even possible for someone else you’ve shared your finances with in the past, such as a spouse or a sibling, to affect your credit score negatively. Again, it’s better to know this ahead of time and resolve it than get your application denied.
4. Do You Have Past Financial Records?
To establish your ‘average’ income over a period, your lender might ask to see your business records. This can give them an indication of the kind of cash flow you have. It can take into account general market changes and seasonal changes if these affect your business. Then, using the financial history you have accrued over the last few years, they can establish a baseline income that tells them what you will be able to afford to make in terms of repayments. It also helps to show that you are financially responsible and that you have kept accurate financial records.
5. Show Them Your Future Plans and Clients
One issue with getting a loan while self-employed is the uncertainty of the future. Of course, no job is “totally secure”, but when you’re self-employed, it can be difficult to know what the future holds. If your loan terms are eighteen months, for example, how does your lender know what you intend to be doing then? To offset this, you can give them the details of any recurring or future clients you have. This tells them that your business is vibrant and that you have a viable chance of maintaining operation through the terms of your loan, which can help get your application accepted.
6. Get Someone to Guarantee the Loan for You
If you want the best possible chance of getting your loan, it’s worth considering nominating a guarantor for the loan. This is, as we mentioned, someone who will become liable for the loan repayments if you default on them. As long as it’s a person you know and is of good standing, they can act as your guarantor if they’re willing – though bear in mind they will be subject to the same financial checks as you. It’s also worth remembering the risk they are taking by guaranteeing a loan for you. Be sure you make them aware of the consequences of failure to make the repayments.
Is It Easy to Get a Loan While Self Employed?
The simple answer is yes – provided you take a methodical and practical approach to it. If you find the right kind of loan to suit your purposes and make sure you know what the loan requirements are before you apply, you should have no issue finding the right kind of loan for you.
There was a time when amount limits and higher interest rates always characterised self-employment loans. But more and more people are becoming self-employed every year, which means there are now just as many options for a self-employed loan as there are if you’re salaried.
If you have kept accurate financial records for your business, you have a definite business plan going forward, and you have got a reasonable amount of work in your future, there’s no reason you should be denied a personal or business loan while self-employed. The key is to make sure you have all the details you need before you make your application. This means the application is quicker and easier both to complete and to examine.
Remember that just because one lender denies your application, it’s no guarantee that another lender will deny you. So even if you are turned down, don’t let that discourage you from applying to another lender. You might even want to use a loan broker, who can get you multiple offers on the same application, even if you’re self-employed.