Can I Get a Personal Loan While I Am Self-Employed?

Personal loans are a great way to finance a home project, pay for car repairs, or help pay down your bills. If you’re self-employed or own a small business, you may be wondering if you can apply for a personal loan or if your employment status disqualifies you.

Self-employed individuals qualify for personal loans, but your income and finances will be scrutinized more than employed people.

Traditional banks and credit unions both offer personal loans to self-employed people. Credit unions offer additional benefits unavailable in most banks and base your loan approval on additional factors beyond your income and credit score.

They may offer you better rates and terms for your loan or allow you to qualify for loans that you were unable to receive from banks.

Types of Personal Loans

There are two types of personal loans, secured and unsecured loans. Each personal loan type offers a fixed amount that you receive in one lump sum and repay in monthly installments over time. Personal loans give you complete flexibility in how you spend your money.

Secured personal loans use your own collateral to help you get the loan. They are easier to qualify for and offer lower interest rates than unsecured loans because your lender views them as less risk. If you default on your secured loan payments, your lender has the right to seize the property you put up as your collateral.

Unsecured personal loans do not require the use of collateral to qualify for the loan, and you are not subject to the loss of your property if you default on your unsecured loan. You can use an unsecured loan to pay for your personal finances, including credit card debt consolidation.

What You’ll Need to Apply for a Loan

Being self-employed complicates the process of applying for a loan. You’ll need different documentation to verify your income and your ability to pay back your loan during your application process.

Tax information

People who companies employ can verify their income by submitting pay stubs or copies of their W-2 forms. Banks need to know that you earn enough income to make the monthly payments on your loan. It’s more challenging to prove you have a steady stream of income when you’re self-employed.

Banks may request several years’ worth of tax returns from you to verify your income. They may also ask for a tax transcript that shows your adjusted gross income. Your loan may be based on your net profits or loss in addition to your gross income.

It’s a good idea to collect your 1099 forms for the past couple of years for your loan application as well. You can’t have too many documents that show proof of your income when you’re self-employed.

Bank and other financial statements

Your lender may ask for copies of your bank statements to show you have enough money in your bank account to make monthly installment payments on your loan. Having statements on hand from other financial institutions such as retirement accounts or investment portfolios offers further proof of your ability to pay back your loan.

Credit check

Lenders base their rates and terms on your credit score. The higher your credit score, the more creditworthy your lender will deem you. Your credit score and creditworthiness help lenders determine your loan amount and the interest rate your loan is charged.

Your lender may make a hard credit inquiry when you apply for your loan, which can cause your credit score to fall slightly. Some lenders have pre-approval options so you can avoid the hard check of your credit and keep your score higher.

Consider a co-signer

If your credit score is low, or you won’t be able to meet the requirements of a personal loan on your own, consider adding a co-signer to your loan. This adds a backup layer of protection for your lender. Your co-signer is also responsible for the payments on your loan. Adding a co-signer is an easy way to ensure you qualify for your personal loan. Your lender will verify their credit score and income in addition to your own during your application process.

Other collateral

If you’re applying for a secured loan, you’ll have to provide collateral during your application. Collateral is your personal property that you are using to help secure and back up your loan. It includes things like vehicles, your house, savings accounts, and certificates of deposits. Collateral reduces the financial risk for your lender and makes it easier for you to qualify for your loan.

Along with the above information, your lender will ask for personal information such as your address, social security number, and your citizenship status. You will also need to include the reason for your loan and how much you seek to borrow.

Alternative Types of Personal Loans

If you fail to qualify for a personal loan, or the loan you are eligible for doesn’t meet your needs, you have other options. Self-employed individuals can take out home equity loans and additional credit cards.

Credit cards

You can access new lines of credit by opening a credit card. You can use it to consolidate your other credit card debt or use it to pay for services or repairs. Just be aware that interest rates on credit cards can be much higher than rates for personal loans.

Home equity options

A home equity loan is an excellent option if you’re looking for money to pay for home improvements or repairs. You’re allowed to borrow up to 85% of your home’s equity, and interest rates for this loan may be lower than a personal loan.

A home equity line of credit (HELOC) is an additional option. This line of credit lets you borrow against the equity of your home. You’ll make payments only on the portion of the loan you use.

Personal Loan while Self-Employed

Benefits of Loans from Credit Unions

Credit unions are a friendlier and community-oriented alternative to traditional banking. A credit union is a financial cooperative that operates like a bank and offers members the same banking and financial services. They are owned and operated by their union members and are considered not-for-profit organizations. Credit unions re-invest profits made from their services in their members by offering better interest rates.

Residents need to become members of their local credit union to use the services they provide. Credit union members can open checking and savings accounts, investment accounts and apply for personal loans through their organization. Personal loans from credit unions offer members benefits they won’t receive at traditional banks.

Lower interest rates

Credit unions can offer their members lower interest rates on loans than traditional banks. You may find a more reasonable rate on your personal loan or credit card by going through your credit union.

Less reliance on credit score alone

Credit unions don’t require you to have a minimum credit score before you qualify for a loan. Credit unions also look at your entire financial situation, so a lower credit score won’t ruin your ability to get a fair interest rate on your loan. They’re a great option if you have little to no credit history or are working to improve your credit score.

Applying for a Personal Loan With T&I Credit Union

If you need help financing a project or paying off debt, a personal loan may be the right choice for you. T&I Credit Union offers unsecured and secured personal loans to our members in Michigan. Our application process is straightforward, and you can even apply for your loan online. Contact us today at (248) 588-6688 to learn more about the personal loans our credit union offers.

About Jeff Jacobs

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