When you work for a business or a company, it is relatively easy to secure a loan since you have formal documentation of work and a stable income. When you work for yourself, you may be concerned that you will not be able to access a personal loan or a business loan. Fortunately, self-employed individuals can apply and be granted loans like everyone else.
That said, it may require effort to ensure that you choose the right lender, apply for the proper type of loan, and include all the relevant, detailed documents. Since this is the case, this article will cover the types of loans available for self-employed individuals, typical self-employed loan rates, required documents for applications, and important factors in finding the ideal lender.
When you are self-employed, you may be interested in applying for a personal loan or a business loan. Typically, a personal loan can be advantageous when you wish to undertake a large project or large purchase. There are many different types of personal loans including:
- Unsecured Personal Loan: An unsecured personal loan does not contain personal collateral, such as your house. Since this is riskier for lenders, it may not be available from all lenders for self-employed individuals. If it is, it customarily will carry a high interest rate.
- Secured Loan: A secured loan does contain personal collateral, such as your house, which the lender can seize from you if you fail to pay your loan back.
- Fixed Rate Loan: When you have a fixed rate loan, the interest rate will stay stable over the duration of your loan repayment.
- Variable Rate Loan: A variable rate loan will keep a fixed rate for a certain period, then change to reflect the market at a specific point in time.
- Co-Signed Loan: A co-signed loan is an excellent way to secure a loan when you will not qualify for it on your own. A co-signer agrees to take on the debt if the borrower cannot pay back the loan.
- Line of Credit: A line of credit allows you to borrow money as you need it, up until a certain amount, and only pay interest on the amount you use.
- Credit Card: Like a line of credit, a credit card lets you borrow money as you need it, up until a certain amount and only pay interest on the amount you use.
- Payday Loan: A payday loan allows you to borrow a small amount of money present and pay it back in a short amount of time.
If you are one of the 31.7 million small businesses run in the United States, you may need to apply for a self-employed business loan such as:
- Business Credit Card: A business credit card gives you access to funds up to a certain amount and you only need to pay interest on the amount you use.
- Business Line of Credit: A business line of credit gives you access to funds, when necessary, up until a certain amount.
- SBA Small Loan: If you require a small business loan, you may apply for a small loan backed by the Small Business Administration.
- Secured Business Loan: The lender will require a personal collateral, such as real estate which can be seized if you do not repay the debt.
When you are applying for a personal loan or business loan, one of the main components to consider is the interest rate. As you will most likely be paying your loan back over a long period of time, the interest rate will play a crucial role in the total amount you will owe. For a personal loan, the interest rate is usually between 2% and 35% whereas a business loan is typically between 2% and 8%. That said, it will depend on many factors such as:
- The Lender: Banks may have the lowest interest rates; however, they also have the strictest qualification requirements. Local lenders may have less qualifications, but higher interest rates.
- Loan Type: An unsecured loan, for instance, may have a high interest rate.
- Amortization: A fixed rate loan will set an interest rate for the duration of your loan repayment, while a variable rate loan can change according to the market.
- Financial Situation: When you are applying for a loan, your lender will look at various factors concerning your financial situation. For instance, income, credit score, debt to income ratio, revenue, amongst others.
- Collateral: With a secured loan, lenders will ask you to place high-value assets as collateral for your loan. If you do not repay the loan, these assets can be seized by the lender. Depending on the value of your collateral, your interest rate may fluctuate.
Every lender will have its own set of rules and requirements; accordingly, it is important to verify the specific documents that your lender will need to process your loan application. That said, there are general documents that are necessary for every self-employed personal and business loan:
- Proof of Income: Your proof of income may be tax returns, billing receipts or contracts, or business records.
- Bank Statements: Lenders will ask for at least 3 months of bank statements.
- Proof of Identity
- Proof of Address
- Company Information: If you are applying for a business loan, you will need to supply information about your business as well including name, address, and financial health.
When you are searching for the right lender or loan officer, you can usually choose from a broker, a direct lender such as a bank or credit union, or a market lender (such as the Small Business Administration). Choose your lender carefully, as you are dealing with a financial contract that will lock you in in a specified amount of time and potentially place your assets on the line.
As a self-employed individual, you may be accustomed to having to deal with complicated processes with finances. However, when you are applying for a loan, you have access to the same loans that individuals employed by businesses have access to. Fortunately, as demonstrated in this article, the process for finding and applying for self-employed personal loans and self-employed business loans can be quite simple.