For many formerly employed people, self-employment signifies freedom; freedom to choose the kind of jobs you want, your working hours, where to work from, and when to work.
But being self-employed also makes you solely responsible for your finances — including figuring out how to get a personal loan. If you are self-employed, here's how to apply for a personal loan:
- Choose whether to opt for a secured or unsecured personal loan.
- Consider your credit score and history.
- Decide on the amount to borrow.
- Shop around and compare interest rates.
- Get documentation to verify your income.
- Get pre-qualified.
- Have your personal documents ready.
- Submit your duly filled loan application form.
A personal loan comes in handy whenever you need to cover a personal expense. You could use it to make a significant purchase, settle a bill, consolidate debt, or undertake home improvements.
Thus, knowing how to apply for a personal loan while in self-employment and the exact application criteria is crucial. Keep reading to find out more.
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1. Choose Whether to Opt for a Secured or Unsecured Personal Loan
Let's explore both options further:
A secured personal loan requires some form of security or collateral for you to qualify for a loan. Typically, the collateral is the asset acquired with the loan.
For instance, if you’re applying for a car loan, you (the borrower) offer the lender something valuable, like the car, as collateral for the loan. Your house or savings could also act as collateral.
The lender is entitled to take ownership of the collateral if you stop remitting payments. Lenders usually view secured loans as less risky since borrowers are less likely to default on payment for fear of placing the collateral at risk.
As a result, they offer more favorable terms such as a higher loan amount or lower interest rate than you would get with an unsecured loan.
The downsides of going for a secured loan are:
- You could lose your collateral if you can’t make payment.
- The loan is used to buy a specific asset; hence, the funds cannot meet another need.
- The approval process is somewhat complicated, requiring additional time and paperwork.
You don't need any collateral to qualify for an unsecured loan. Unsecured loans are also known as signature loans because once approved, you receive the money with your signature as the sole commitment to repay the funds.
With an unsecured loan, the lender relies on the borrower's creditworthiness to decide whether to approve the loan or not. Different lenders might consider different personal financial factors as well.
The loan approval process is relatively simpler and faster since there's minimal paperwork. However, approval often depends on a strong credit and financial history.
The drawbacks of taking an unsecured loan are that the loan limits are considerably lower, plus the lender might charge a higher interest rate. That’s because the lender considers such a loan potentially riskier than a secured loan.
Worse still, non-payment could negatively impact your credit score, with the damage lasting several years.
Secured Loans vs. Unsecured Loans: Which is the Best Option?
Now that you have a good idea of what a secured and unsecured personal loan entails, it's much easier to make an informed decision on what option to go for.
Either option is preferable to taking on a high-interest credit card debt. An unsecured loan would be ideal for you if:
- Your financial profile is solid.
- You don't want to place valuable items like your home or car at risk.
- You have no collateral to offer.
That said, carefully evaluate the benefits and risks of each type of loan, then consider your unique financial situation to make the right decision.
If an unsecured loan isn’t a viable option, you still have a high chance of qualifying for a secured personal loan due to the collateral attached. Furthermore, you might even get better terms and higher lending limits.
2. Consider Your Credit Score and History
It's advisable to establish your credit score before you apply for a personal loan. That’s because it plays a significant role in getting approval for the loan.
Your credit score also determines your loan terms once you receive approval. In other words, a high credit score can make you more likely to get loan approval and at a better interest rate.
Additionally, a good credit score could give you the leverage you need to apply for an unsecured personal loan. Note that if your score is poor, your lender might request collateral.
Alternatively, you might decide to improve your score before applying to get the most favorable terms possible. While different lenders will have different eligibility requirements for personal loan approvals, most of them rely on the FICO Score.
The system helps lenders review borrowers' credit. Credit scores typically range between 300 - 850, and your score depends on your payment history, credit history period, and outstanding debt amount.
It's important to point out that you can still access a personal loan, even with a poor credit score or short credit history. Most lenders are willing to consider your loan application if you have a co-signer.
Still, your co-signer needs to have a regular income plus a favorable credit history, among other positive financial attributes.
3. Decide on the Amount to Borrow
Once you have confirmed your credit status, you can then decide on the amount of loan you would be comfortable applying for. Ideally, this would be an amount whose monthly repayments you can cover without a hassle.
The repayment period for most personal loans is over a 2- to 5-year period. The general rule of thumb when going for a loan is to limit your borrowing to what is necessary.
That said, borrowing a lower amount than your actual need might force you to turn to pricier loan options later on. Finally, it's crucial to ensure you can afford to make payments on the amount you decide to borrow.
Use a personal loan calculator to determine how much you expect to pay in monthly payments. To give you a better idea of how much you'd need to pay every month, consider the prevailing interest rates.
This takes us to the next step; comparing lenders' interest rates.
4. Shop Around and Compare Interest Rates
Once you have determined the type of loan you wish to go for, shop around. Visit lender websites and check eligibility terms, compare interests rates, fees, and lending limits offered by different lenders.
Additionally, you might want to check out the types of personal loans on offer to establish the most suitable one for your needs. Each lender's offering is unique, plus the loan qualification or eligibility criteria could also vary considerably.
Hence, you need to comb through the various offers to determine the best fit. In general, your lender options might include the following:
- Banks: These mostly prefer personal loan clients with high credit scores, since this can act as a pointer to how an individual manages their credit.
- Credit unions: These can be more flexible with their requirements. They also offer loans at lower interest rates than banks, but you need to be a member to qualify for a personal loan.
- Online lenders: These consider various financial details when evaluating your eligibility but typically offer better loan terms for individuals with good credit history. Still, you need to ensure that the given lender holds a lending license, permitting them to issue personal loans in your state.
- Non-Banking Financial Institutions (NBFIs): These don’t own a banking license and include insurance and finance companies, peer-to-peer lenders, and payday lenders. Finance companies often charge much higher interest rates than banks or credit unions. However, they may approve a loan that your bank might choose to decline. Conversely, payday loans are notorious, featuring high-interest rates and hidden fees.
When it comes to fees, your lender might require you to pay personal loan origination fees. These cover the costs of running a credit check and processing your application.
The fees range between 1 - 8% of the total loan amount, and you may need to pay the amount upfront. Alternatively, the lender might load the fees onto the loan amount.
Fortunately, banks and credit unions rarely charge loan origination fees. Finally, find out whether any other fees apply. These might include late fees or penalties for repaying the loan earlier than scheduled.
5. Get Documentation to Verify Your Income
Lenders need to ensure that borrowers can repay their loans. Hence, they impose income requirements and also want to know your annual income. Some might have a minimum income requirement and want to know about current debts.
A lender will also need to calculate your debt-to-income ratio or the portion of your monthly gross income dedicated toward debt repayments. It will help determine your ability to make additional monthly payments and the amount you can manage comfortably.
Unfortunately, income verification can be a challenge for the self-employed. That’s because you might not have an employment history, current earnings in the form of pay stubs, or a letter from your employer to show as evidence.
As such, you would have to rely on 1099 forms, bank statements, and income tax returns. Besides, showing proof of steady, reliable cash flow as a business owner, freelancer or contractor might require additional paperwork than W–2 employees.
6. Get Pre-qualified
At this point, you'll have determined your eligibility for a personal loan with the most viable lenders. You can take this a step further and undergo a pre-qualification by each lender to establish whether you fit the general financial profile of their borrowers.
Conduct your rate shopping over 45 days to prevent any negative effect on your credit score. Note that a pre-qualification doesn’t guarantee you’ll get a loan.
The process normally involves filling out an online form detailing your name, income, address, and the amount you wish to borrow. The lender then conducts a soft credit inquiry, after which you’ll receive a notification of whether you are pre-qualified for a loan.
7. Have Your Personal Documents Ready
As part of the loan application process, your lender will require documents confirming your identity and residence. It could be your passport, driver's license, or social security number for the former and a utility bill or a copy of your lease agreement for the latter.
Your pre-approval letter also indicates the documentation needed for an actual loan application. Different lenders will have different requirements, so the specific documents needed might vary.
But generally, the lender will request you to provide personal details. You'll also need to fill in a loan application form stating your reason for applying for the personal loan and the amount you wish to borrow.
8. Submit Your Duly Filled Loan Application Form
Now that you have all your documentation, visit your preferred lender to complete the process. Alternatively, you can submit your duly filled loan application form online and then wait for results.
Note that you can apply for your personal loan from more than one lender — go for the ones that pre-qualified you — then pick the one offering the most favorable terms.
Consider the following:
- The terms of the loan.
- Applicable fees.
- Penalties for missed payments, late payments, or prepayments, if applicable.
- Monthly payments.
- Interest rate — is this fixed or variable?
- Is the loan secured or secured? If secured, what's the collateral?
Once satisfied, accept the terms of the loan and wait to receive your funds. Also, consider setting up automatic payments to make paying off your loan seamless.
If you can’t get approval, take the following steps, then re-apply:
- Find out why your application was denied.
- Review your loan application form for inaccuracies.
- Reduce your loan amount.
- Improve your credit score — pay off any outstanding debts.
Applying for a Personal Loan
Applying for a personal loan is a straightforward process once you know what you need to do. So, before you even start shopping around for a personal loan, try to learn about the standard qualification requirements, including the documentation you'd need to provide.
Having this information can help make the application process more straightforward while enhancing your chances of qualifying for the loan.
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I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.