Personal Loan for Self Employed, a Guide
When determining if an applicant qualifies for a loan, lenders look for consistency and reliability in income. This can ultimately work against the self-employed, whose revenue streams are often variable and inherently inconsistent.
In practice, this means the self-employed must provide more documentary evidence of their financial status and income. This article explores the process of taking out a loan as a self-employed worker, including the documents you will need to provide and the challenges you may face.
Do Self-Employed Individuals Qualify for Personal Loans?
Yes, self-employed workers can qualify for personal loans. Qualifying for personal loans mostly comes down to your income and credit score. While the self-employed don’t have as consistent an income as regular salaried workers, self-employed workers can still easily earn enough income to qualify, especially if they have good credit.
What to Expect When Applying for a Loan While Self-Employed
The main difference you can expect when applying for a loan as a self-employed worker is the required documentation. Where regular workers can document income with only a paystub, a self-employed worker will need to provide lenders with a much broader scope. See the following section for a breakdown of the documentation needed to qualify for a self-employed loan.
Documentation for Self-Employed Loans
The documentation needed for a self-employed loan will vary depending on the lender and the type of work you do. However, prepare to submit all of the following documents to the lender upon applying for a loan.
You may be asked by your lender to provide a bank statement. However, this is often unnecessary for an unsecured loan, since the loan will not require a down payment or collateral. Bank statements only provide a snapshot of your assets. Instead, lenders look for documentation that can tell them about the consistency of your income and your credit history.
Lenders are much more likely to ask you for a copy of your tax returns since this will provide them with detailed information on your income over a longer period of time. Typically, they will ask for at least two years of signed tax returns. However, lenders will place less stress on documents like tax returns if you have a very good credit score. Expect to provide other tax forms as well, like your Schedule C and SE, and a 1099-MISC Form.
The Schedule C
If you are a sole proprietor or a single-member LLC, you will likely be asked to produce a copy of your most recent Schedule C tax document. The Schedule C documents the profit or loss of your sole proprietorship or LLC. Lenders will use this document to determine the cash flow of your self-employment, and ultimately how much you earn. The higher the profit, the more likely it is that your application will be accepted.
Expect to provide a copy of your 1099-MISC tax document to your lender as well. A 1099-MISC form is required of all independent contractors and providers of legal and medical services who have given or received a payment of $600. As with the Schedule C and SE documents, lenders will use this form to determine the amount and consistency of income you receive.
The Schedule SE
Lenders will also ask you to provide a copy of your Schedule SE tax document. The Schedule SE is your self-employment tax form, which details the amount of taxes you have paid, including towards Medicare and Social Security. A reputable lender will want confirmation that you have paid taxes on your self-employed income. If you do not have a Schedule SE, or there are discrepancies in your Schedule SE, lenders may determine that you are at risk of an audit, and will avoid disbursing you a loan.
How to Get a Personal Loan with Stilt
Stilt is an online lender that gears its services toward the immigrant and noncitizen community, many of whom are self-employed. Getting a loan with Stilt is a straightforward, three-step process.
- Fill out an application: First, you have to complete an application with the details of the loan that you require, along with personal information. For the self-employed, some or all of the forms listed above may be required, depending on your credit score. You will also submit to a soft credit check.
- Get a decision: You will receive a decision on your application within 24 hours. If your application meets the eligibility requirements you will qualify for an amount, term length, and an interest rate.
- Start making payments: With the funds in your account, you can start making payments on your loan on the agreed-upon date.
Will a Loan Be More Expensive If I Am Self-Employed?
While it depends on your particular financial situation, loans for self-employed workers aren’t always more expensive than loans for salaried workers. Each lender has their own method of assessing an applicant’s finances. Lenders which put more stress on credit score than income may not penalize a self-employed worker if they have good credit. Also, a lender like Stilt, which focuses more on peripheral factors like employment history, skills, and education, may offer comparable loan rates to self-employed workers.
However, generally speaking, lenders look for consistency with income, and the inherently unreliable nature of contracting may make lenders deem the self-employed a higher risk. As a higher risk loan candidate, the self-employed may face higher interest rates. Self-employed individuals can consider using a cosigner, which will likely help them qualify for a lower interest rate.
Self-employed workers may get penalized by lenders for not having a reliable, salaried job, but with the proper documentation, they can obtain personal loans. Immigrants and noncitizens often face challenges in obtaining loans as well, but lenders like Stilt have constructed their eligibility requirements to include visa holders. With a few simple steps, self-employed immigrants can get a loan, and the process only takes a couple of days end-to-end.