One downside of leaving a traditional 9-to-5 for a life of self-employment is navigating your personal finances as a sole proprietor. From invoicing, to estimating taxes, it’s all on you — because you’re the boss now.
Qualifying for a personal loan while self-employed could also present some challenges. Self-employed individuals may have a need for a personal loan, but may find it difficult to produce traditional documentation, like W-2s or pay stubs, used to verify income. But, there may be options to fit your loan needs after all.
How to Get a Personal Loan if You’re Self-Employed
A brief personal loan explanation — a personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a work sabbatical, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a credit card, if you don’t have the means to pay the balance off right away.
Personal loans are typically unsecured, meaning a lender won’t require collateral. Though they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing of the borrower, and typically include their credit history and current income.
Lenders often evaluate a potential borrower’s income as a major factor in their decision-making process. Those who are self-employed may find this a tad more challenging than someone who works a traditional job with regular payments.
Self-Employed Loan Requirements
Loan requirements for self-employed individuals will be similar to the typical loan requirements as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.
Traditional documentation used to verify income includes pay stubs and W2s. However, self-employed people may have some difficulty producing these documents, because they often aren’t W2 employees. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork.
In general, lenders are looking for borrowers who have income stability and it can help if the borrower has been working in a single industry for at least two years. A short employment history could indicate that you are a borrowing risk.
Showing Proof of Income When Self Employed
Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as documentation to prove their income.
Tax Statements. Self-employed individuals can use tax statements, like their 1099 to offer proof of income. This form should outline your wages and taxes from the previous year. Lenders often view tax documents as a reliable source of income proof because they are legal documents.
Bank Statements. Bank statements could be used if there is a regular history of deposits that illustrate consistent income.
Profit and Loss Statement. This document provides an overview of your costs, expenses, and revenue.
Court-ordered agreements. These may include things like alimony or child support.
Keep in mind that each lender will likely have their own application requirements, so be sure to read those too. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.
Consider Having a Cosigner
In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, have any trouble making payments.
A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application.
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Personal loans can be useful for those who are looking to consolidate debt, cover the cost of an emergency expense, or pay for other personal expenses like a home renovation or wedding costs. The personal loan average interest rate is lower than the average credit card interest rate.
If you’re interested in a personal loan be sure to shop around to compare the interest rates and terms available to you at various lenders. Look into any fees, especiallying prepayment penalties if you are interested in paying your personal loan off early. As you browse, consider SoFi’s personal loans, which have no fees and offer competitive interest rates to qualifying borrowers.
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Why It’s Difficult for the Self-Employed to Get a Personal Loan
It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.
For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.
The Income Challenge
Proving consistent and stable income is the biggest challenge for self-employed individuals. Because you are not guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to pay for the personal loan. Some lenders may request tax returns for several years in order to verify your income.
Consistency in income is another major hurdle for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments and it’s even better if there is an increasing trend over time.
Personal Loan Alternatives When Self-Employed
Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Other options to consider a credit card, cash advance, or a home equity loan.
Credit Cards With 0% APR Promotions
Credit cards can have high-interest rates, but with a 0% APR promotion, a credit card could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.
Recommended: Average Credit Card Interest Rates
A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a high-interest rate for borrowing. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.
Home Equity Loans or HELOCs
If you are a homeowner, you can tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.
A HELOC is a revolving line of credit that the borrower can draw from, and once it is repaid, continue drawing from during a specified period of time.
Recommended: Different Types Of Home Equity Loans
Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans from small business administration, banks, or even some business credit cards.
It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, however, avoid borrowing a business loan and vice versa.
The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements.
SoFi understands that a full-time job isn’t the only qualifier of financial stability. SoFi will also consider factors like your credit score, education, and whether you have a cosigner. Loan eligibility depends on a number of additional factors, including your financial history, career experience, and monthly income versus expenses.
Getting a personal loan when you’re self-employed doesn’t have to be a huge headache. Check out SoFi personal loans today.
Can you get any loans if you’re self-employed with no proof of income?
It is possible to get a loan if you are self-employed, however with zero proof of income it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.
Are there any loans for self-employed people with bad credit?
While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. If that’s not enough, another option may be to add a cosigner.
Can self-employed freelance workers get personal loans?
Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders. Those with a strong credit score and history may qualify for more competitive rates and terms.
If a self-employed freelancer is struggling to get approved for a personal loan they could consider adding a cosigner to help strengthen their application.
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