There are many benefits associated with becoming self-employed. Being your own boss, choosing your hours and selecting which projects you take on can all make a big difference to your working life. However, believe it or not, there are some aspects of being an employee you may miss. Not having paid time off is a big one, but not having a set salary that you take home every month can also cause problems when it comes to accessing financial products you’d usually take for granted.
The truth is that getting a loan when you’re self-employed can be tricky, but you still have plenty of options. In this guide, we’ll look at the types of loan you can apply for when you’re self-employed and the documents you’re likely to need to be successful.
What loans can you apply for when you’re self-employed?
Although your options may be more limited, if you’re self-employed but have a good credit history and can satisfy the lender’s affordability criteria, you should still be able to access several different loans. That includes:
- Personal loans – Personal loans are loans that are not secured against any asset. For that reason, if you’re self-employed, you’ll need a good credit history to be accepted for this type of loan. The lender Wonga states that they do not explicitly decline a potential borrower for a personal loan just because they’re self-employed. However, they must be able to provide evidence that they’re capable of meeting the minimum monthly repayments.
- Secured loans – If you do not have the credit record or documented income to be accepted for a personal loan, it might be worth considering a secured loan. This is a personal loan that’s secured against an asset such as your home. The benefit of a secured loan is that you’ll generally pay lower rates of interest due to the additional risk protection the lender has. However, if you cannot repay the loan, you could lose your home.
- Guarantor loans – If you’re still struggling to get a loan, another option to consider is a guarantor loan. In a guarantor loan, you ask a third-party such as a friend or family member with a good credit record to act as a ‘guarantor’ for the loan. If you are unable to make the loan repayments, it will then fall on them to repay the loan. For that reason, anyone thinking about being a guarantor should consider their position very carefully. Although your likelihood of being approved for a guarantor loan will increase, the rate of interest you pay could be quite high.
- Business loans – Some self-employed people apply for loans to help them grow their businesses. Business loan applications will be assessed purely on the financial strength of your business, so if your business is in a strong financial position, you stand a good chance of being accepted.
What documents do the
self-employed need to apply for a loan?
The first step when applying for a self-employed loan is to check your eligibility. Most lenders will allow you to do this without it being marked on your credit record. You must also have up-to-date financial documents to hand so lenders can assess your application. You’re likely to need:
- Proof of ID: A passport or driving licence will do.
- Proof of address: Copies of utility bills or bank statements are usually acceptable.
- Tax returns: A lender will typically ask for your last two self-employed tax returns to see your earnings for the last two years.
- Bank statements: A lender will usually ask to see your last three bank statements so they can corroborate the earnings shown in your tax returns and your expenditure as listed in your application.
- Business information: This can include the status of the business and the details of anyone else who has a financial interest in it.
Have you struggled to access a self-employed loan? Please share your experiences with our readers in the comments below.