How to Get Loans for the Self-Employed in 6 Steps

A personal loan could be the most convenient way to get the funds you require for unforeseen costs like car repairs, home renovations, or debt consolidation.  However, obtaining a loan for self-employed individual may be more challenging than for an employee of a W2 organization.

To reassure you, personal loans for the self-employed are still an option. Follow these six easy steps, and we’ll show you how to acquire one.

1. Review and Check Your Credit Score

It might be challenging to get approved for a personal loan when you’re self-employed and don’t have a long credit record. You or your credit card issuer can check your credit rating online at no charge. If you need a personal loan and want the best rates and terms, your credit rating should be at least 720.

Checking your credit report for errors on AnnualCreditReport.com is also a good idea. If you check your credit report early, you’ll have time to fix any mistakes or look into strategies to improve your rating.

2. Compare Multiple Lenders

Shopping around is highly recommended for people in the self-employed loan market because lending policies vary widely. Check out the many deals and conditions that are available. Using this method, you can select the most suitable personal loan for your needs.

There’s no shame in going with the cheapest option, as most people do. However, there are other aspects to think about that may be relevant to your situation:

• Creditor ratings and reviews
• Specific policies (if any) for self-employed people
• Referrals from your network

3. Get Prequalified

Prequalification is available from some loan providers. Through this procedure, you can assert the creditor’s likelihood to grant your loan request. Before submitting your application, they will also go over the terms for which you may be eligible. 

The best way to safeguard your credit rating throughout the prequalification process is to insist that the creditor only perform a light credit check.

4. Complete the Needed Requirements

Since your working position is unique, obtaining a personal loan as a self-employed person normally necessitates more paperwork. Gathering this information in advance will make the application process with your creditor go more smoothly.

Different personal loan providers will have different paperwork standards. However, it is usually recommended to prepare these documents in advance:

• Tax statements (tax transcripts, returns, or schedules)
• Profit & loss statements
• Bank statements
• 1099s

Creditors normally impose paperwork on salary for the previous two years to establish a baseline of stability. The more time you’ve spent as a self-employed person and the more evidence you have of a stable salary, the greater your chances of being accepted.

5. Submit Your Application

The next step is to submit a loan application to the creditor of your choice. You can apply in person at a branch or online; in some situations, you may also need to call the creditor to finish the process.

You should be prepared to show monetary records and proof of business salary to a potential creditor. They might also want that you provide certain other paperwork, which will impose some digging on your part. The sooner you can respond to your creditor and provide the necessary paperwork, the sooner they can make a decision on your loan application.

At this point, your creditor will do a thorough credit check to confirm the accuracy of the information listed there. As this may have a negligible effect on your credit rating, you should be sure you are ready to apply for the loan before proceeding.

6. Wait for Approval

After examining your paperwork, your creditor will let you know if you meet their prerequisites. The time imposed for this varies. Sometimes the decision is made nearly immediately. However, the creditor may be more cautious about giving you a loan because you’re self-employed. It may take a few days or longer to hear back.

Can You Really Get a Loan If You’re Self-Employed?

When requesting for a loan, self-employed individuals may face more stringent prerequisites because they are expected to meet the same benchmarks as traditionally organized firms.

Creditors may view sole proprietors as higher risk than limited liability firms or corporations when deciding who to extend credit to.

In the event of a lawsuit or monetary difficulties, a self-employed individual’s personal assets may be in danger if their business is not legally separated from the person. Even if they otherwise qualify for a loan, this may affect their capacity to make timely payments.

There are normally minimums in terms of business age, annual salary, and credit rating that must be met in order to qualify for financing. You should be ready to show that you can afford to pay back the loan by submitting a business plan and monetary statements, such as tax returns and bank accounts.

Is It Harder to Get a Loan if You’re Self-Employed?

It’s common knowledge that self-employed people have a harder time getting loans than their employed counterparts. Paychecks of salaried workers tend to be more consistent, thus creditors may be more cautious with them.

In some cases, self-employed workers may be requested to provide additional paperwork to verify their salary in place of traditional pay stubs. If you’re requesting for a loan, the creditor may request two months’ worth of bank statements to verify your salary, expenses, and payment record.

Your personal tax return and/or IRS forms Schedule C and Schedule SE may also be requested as additional verification papers. A request for more than one year is possible. Creditors are looking for evidence that you can repay a loan and that your firm has a solid foundation upon which to build.

What Are the Loan Options for Self-Employed Workers?

There are a number of online creditors that will work with independent contractors. Please see the three samples below.

1. Payoff – Payoff focuses solely on helping people pay off their credit card debt. Consolidate your several credit card payments into one affordable monthly installment loan payment of up to $35,000. 
   
   You may rest assured that Payoff will use both your tax return and Schedule C to confirm your salary. The payoff may also ask for a copy of your most recent bank statements if you have a salary-generating bank account.

2. Upgrade – Whether it’s for a new roof, a new car, or any other large purchase, Upgrade can help you get the funds you need with an unsecured personal loan of up to $50,000. Upgrade imposes its self-employed applicants to provide two years of tax returns (including Schedule C), IRS transcripts, and bank statements covering the last 40 days.

3. SoFi – If you need a loan for a major medical need, debt consolidation, home improvements, or a move, go no further than SoFi, an online creditor that offers installment loans of up to $100,000. 
   
   When deciding whether or not to grant a loan to a self-employed person, SoFi considers the applicant’s credit rating, educational background, employment record, and monthly salary after deducting necessary living expenditures. You might also be able to obtain approval with the help of a co-signer.

Bottom Line

Self-employed people are familiar with monetary red tape, but there are certain additional prerequisites they must meet. In the case of a loan application, it’s the same. If you’re self-employed or run a one-person show, your salary stability may be further scrutinized by creditors.

If you’re self-employed and thinking about taking out a personal loan, you should first look at your finances to assert how much of your salary can go toward making the monthly loan payment.

Next, you should investigate several loan possibilities from various monetary institutions like banks, internet lending providers, and credit unions. If you shop around, you might discover a loan or credit card with the best rates and fees.