Self-employed people face some unique situations due to the variability of income streams, but that doesn’t mean they can’t get a personal loan. Lenders follow a specific process when determining if an applicant will qualify for a loan. One of those factors is whether or not a person has a reliable income. While self-employed people may have inconsistent income, that doesn’t automatically disqualify them from obtaining a personal loan. We’ll look at some of the things to consider about getting a personal loan if you’re self-employed.
How do self-employed people qualify for personal loans?
While there may be a few extra hoops to jump through, self-employed people can certainly qualify for personal loans. To start, self-employed individuals must be able to provide documentation and evidence of their income and credit score.
Most employees who want to get a personal loan are asked to provide a pay stub, whereas self-employed people must provide additional documentation to qualify for a similar loan. This may include the following:
- Bank Statements — Depending on the type of loan, lenders usually require self-employed borrowers to provide bank statements,. This provides the lender with information about your assets, including the consistency of your income.
- Tax Returns —Tax returns provide lenders with more detailed information about your income levels over a longer stretch of time. Most self-employed people will be asked to provide a minimum of two years of signed tax returns, though this may vary depending on the borrower’s credit score.
- The Schedule C — In addition to tax returns, some self-employed borrowers will be asked to provide a recent Schedule C tax document. This is especially relevant for single-member limited liability companies (LLCs) and sole proprietorships because it shows the profit or loss. Essentially, the Schedule C shows your cash flow and how much you earn.
- 1099-MISC Form — “MISC” stands for Miscellaneous Income. This form is required for independent contractors as well as those who provide medical and legal services. The 1099-MISC is similar to the Schedule C in that it helps lenders determine the consistency of your income.
- The Schedule SE — This is the self-employment tax form that documents the taxes you have paid. This is important to lenders because any inaccuracies or discrepancies in the Schedule SE (or lack of one) signals to them that you may be at risk for an audit, which makes you a high-risk applicant.
Are there any differences for a self-employed personal loan?
Every person’s financial situation is different, but there are not too many differences between a personal loan and a personal loan obtained by a self-employed person. Depending on the self-employed person’s financial situation, personal loans may not necessarily be more expensive than those obtained by salaried employees.
Lenders tend to put a heavier emphasis on a person’s credit score than on income. Self-employed workers that have good credit typically find that they do not have any issue getting a personal loan at favorable interest rates. While some self-employed individuals may be deemed higher risk than their counterparts who receive W2s, they do have the option to use a cosigner which can help qualify for lower interest rates.
With the right documentation and a healthy credit score, self-employed individuals can qualify for a personal loan.