Personal Loans when Self Employed: What to Know

There are tremendous benefits when you’re self-employed – financial freedom, and flexibility in your career are two significant ones. But being self employed can also create some frustrations when you try to work with financial institutions that have request traditional work documents like a paystub or a W-2.

Fortunately, even though there might be an extra step or two in the process, you aren’t out of the running for a personal loan just because you’re self-employed. You just need to know what to expect.

Self-Employment and Loans

From the bank’s side of things, they don’t like to lend money if they don’t have the confidence that you will be able to pay it back. That is why they request things like paystubs and W-2s to be sure you have the income to support the loan. Fortunately, you can prove to the bank that you have the income to support a loan in many ways – not just with a paystub.

Before offering you a personal loan, lenders need to know that you have a reliable and steady income stream. If that doesn’t come from a salary, you simply need to demonstrate it in other ways. Some options might include:

Tax returns – Employers send a W-2 that hired workers use on their tax returns. But tax returns can also show a steady stream of income for self-employed workers. Be prepared to show several years’ worth of tax returns to show that you have income that isn’t terribly sporadic. Your tax return may need to be accompanied by a profit and loss statement that shows your net income – not just your taxable one.
Bank statements – A bank statement is another good way to show that you are in a comfortable financial situation. Looking over bank statements for several months might be enough to make a bank feel comfortable that you are able to keep up with the monthly payments your new loan will require.
Collateral – If you don’t have the financial documents to back up your loan request, or you are working with a lender who is not willing to take a risk, you might also be able to offer some collateral to secure the loan. Collateral changes an unsecured personal loan into a secured one – it is secured by something of value.
Tying the loan to your car, a certificate of deposit, part of your business or even your home demonstrates to the lender that you are serious about making payments and that the lender has nothing to lose by taking a risk in loaning you the money. If you fail to make payments on the secured loan, the lender will simply take possession of the item you used to secure it.

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You should be extremely cautious, of course, about what you use as collateral with a secured personal loan. If you tie a loan to your car and fail to make payments, you will likely lose your vehicle. A secured loan transfers the risk back to you, the borrower, so be sure you don’t risk more than you can afford to lose.

Cosigner – A cosigner might be an option if you don’t have the credit score to support a loan or you don’t have much in the way of collateral. A cosigner is someone who signs onto a loan with you, effectively taking on the payments of the loan if you fail to meet the requirements. This adds an extra layer of security for the bank but can be problematic for the relationship between you and the cosigner if something goes wrong with the loan payments on your end.

Alternatives to Personal Loans

There are many lenders who are willing to work with self-employed individuals. As you shop around for loans, if you find that you aren’t satisfied by the terms of traditional lenders, consider an alternative to the traditional bank loan.

Peer lenders – Peer lenders are individual investors who loan money out to other individuals as a form of investment. Peer lenders are facilitated by online platforms and do have some of the same requirements of traditional banks but might have looser standards.
Credit unions – If you are a member of a credit union, that may be a great option for a personal loan. Having accounts with a credit union shows the collective that you are responsible. The credit union lending criteria might be more flexible and generous with self-employed individuals. They don’t have to turn a profit and they may be willing to take on a bit more individual risk for a community member.
Online lenders – There is a huge range of online lenders available, all with different terms and expectations for loans. You may be able to apply for a personal loan based on credit score alone, without having to offer any income verification at all through a personal lender in some cases.

Personal loans can be used for almost anything, and they can offer you excellent flexibility if you are self-employed. It may require a bit of additional payment to be approved for a loan, so before you apply, check your budget, and organize your financial documents. Then you will be ready for any questions or requirements you might encounter in the application process.