Not every person works for an employer, some are self-employed. A self-employed person is one who works independently as a contractor or a sole proprietor. Their income stream is often variable and inherently inconsistent and reported as income earned from self-employment. Because of this if they apply for self-employed loans, the lenders look for consistency and reliability in their income.
The self-employed persons have to provide more documentary evidence of their financial status and income only then they qualify for the loan. In this article, we will be exploring the process of taking out a self-employed loan, the documents they need to provide and the challenges they face.
Do Self-Employed Individuals Qualify for Personal Loans?
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Yes, self-employed persons qualify for personal loans depending on their income and credit score.
What to Expect when applying for a Self-Employed loan?
The main difference while applying for a self-employed loan is the required documentation. The regular workers document their income only with a paystub; self-employed workers need to provide lenders with a much broader scope.
The documentation required for a self-employed loan varies depending on the lender and the type of work self-employed do. Following documents are to be submitted to the lender upon applying for a loan:
The lender may ask for the bank statement. However, it is unnecessary for an unsecured loan, since the loan doesn’t require a down payment or collateral.
A copy of tax returns is asked by lenders as it provides detailed information on income over a longer period of time. Mostly they ask for at least two years of signed tax returns. They may also ask to provide other tax forms as well, like your Schedule C and SE, and a 1099-MISC Form. But if the person has a very good credit score, they need not worry about documents.
The Schedule C
Lenders ask for Schedule C to determine the cash flow and profits. The higher the profit, the greater is the chance of getting the loan.
This is used to determine the amount and consistency of the income. 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.
The Schedule SE
The Schedule SE is a self-employment tax form detailing the amount of taxes paid, including towards Medicare and Social Security. If you fail to provide a Schedule SE or there are discrepancies in it, the lenders will determine you at risk of an audit, and will avoid disbursing you a loan.
Are loans more expensive for Self-Employed?
No, loans for self-employed are not always more expensive compared to loans for salaried workers. Every lender follows their own method of assessing an applicant’s finances. Some give more importance to a credit score than the income. Others like Stilt focus on peripheral factors such as employment history, skills and education and may offer comparable loan rates to self-employed workers.
Generally, lenders look for consistency of income and the reliability of the business. The higher risk loan candidates may face higher interest rates. In that situation, they can use a cosigner to qualify for a lower interest rate.
Self-employed workers can obtain loans easily if they provide proper documentation. The lenders like Stilt provide their services toward the immigrant and noncitizen community, many of whom are self-employed. The online lender has constructed their eligibility requirements to include visa holders and self-employed immigrants can get a loan with a few simple steps. It has a straightforward, three-step process:
Filling out the application form: Firstly the self-employed will need to fill the details of the loan they require, along with personal information. Depending on their credit score, some or all of the forms listed above may be required. They will also need to submit to a soft credit check.
Getting the decision: The decision on the application is received within 24 hours. If the application meets the eligibility requirements, the self-employed qualify for an amount, term length and an interest rate.
Start making payments: The funds get transferred to the account and they can start making payments on their loan on the agreed-upon date.
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