How to Get a Personal Loan When You're Self-Employed

Being self-employed has its perks, like the flexibility of working on your own schedule and the freedom to express your creativity. But it also comes with some challenges, especially when funding important expenses. Whether you’re looking to make a major purchase or tackle unexpected bills like a hospital visit or car repair, getting a loan as a self-employed person could be a bit trickier than it would be if you were working a more typical 9-5 job. Keep reading, however, because loan approval is still possible.

In this article, we’ll explore the loan requirements for self-employed applicants, how to show proof of income effectively, and tips to increase your chances of securing a loan so you can be on your way to whatever personal or professional goal is next.

Loan requirements for self-employed applicants

No matter if you’re applying for a personal loan at a bank, credit union or online, each lender has a different set of requirements. Here are some of the most common loan requirements you may come across:

Proof of income

Lenders want assurance that you have a steady source of income to repay your loan. Loans for self-employed individuals may require you to demonstrate your income through tax returns, profit-and-loss statements, bank statements and invoices.

Good credit score

A solid credit history is crucial in securing a personal loan. Some lenders use your credit score to assess your creditworthiness and determine the loan terms. Having a credit score in the good to excellent range could improve your chances of approval, and you may qualify for lower interest rates and higher loan amounts.

Debt-to-income ratio

Lenders also consider your debt-to-income ratio (DTI), the percentage of your monthly income that goes toward debt payments. A lower DTI typically indicates that you have sufficient income to cover your existing debts and the proposed loan payment. Lenders usually prefer a debt-to-income ratio of 36% or lower, although specific requirements may vary depending on the lender and loan type.¹

How to show proof of income if you’re self-employed

Providing accurate and comprehensive proof of income is important when applying for a personal loan. When you’re self-employed, you may have to do more work to prove your earnings since you do not have a traditional W2. Here’s how you could effectively demonstrate your income during the application process:

Tax returns

Lenders may require tax returns from the past one to three years to evaluate your income stability. Submit copies of your recent tax returns, including Schedule C or Schedule SE, which show your business income and deductions.

1099s

A 1099 form is a tax document used to report payment of nonemployee compensation. If you provided gig work, freelance projects or part-time consulting, you could include your 1099 forms with your personal loan application as proof of that income.

Profit-and-loss statements

These statements provide an overview of your business’s financial health and income consistency. Prepare detailed profit and loss statements for your business, showing your revenue, expenses and net income over a specific period.

Bank statements

Lenders use bank statements to confirm your self-employed income and assess your financial habits and stability. Provide several months of bank statements to verify your income, deposits and expenses.

How to help increase chances of approval

It’s always a great idea to take steps to improve your chances of securing a personal loan, especially as a self-employed individual. Consider the following tips:

Improve your credit score

If you’ve recently checked your credit score and feel that now is not an ideal time to apply for a loan, you may want to pause and work to improve your score to possibly increase your chances of loan approval in the future.

Pay bills on time: Set up automatic payments or reminders to ensure you never miss a payment deadline and avoid late fees. Lenders tend to recognize those who pay bills on time as responsible borrowers.

Reduce your debt: Lowering your overall debt may improve your debt-to-income ratio (DTI) and make you a more attractive borrower to potential lenders. Consider paying off existing debts or consolidating them to simplify your finances. You could also prioritize high-interest debts or accounts with large balances to make the most significant impact on your DTI.

Monitor your credit report: Regularly review your credit report to identify any errors or inaccuracies that may negatively impact your credit score. Dispute any discrepancies with the credit bureau to ensure your credit report reflects accurate information.

Consider a cosigner

If you need extra funds and cannot wait for your credit score to improve, having a cosigner with good credit could strengthen your loan application and increase your chances of approval.

A cosigner is a person who agrees to take joint responsibility for a loan alongside the primary borrower. The cosigner pledges to repay the loan if the primary borrower defaults or fails to make timely payments. Many people use cosigners to help them obtain loans with better terms, including lower interest rates.

Apply for a secured loan

Another option is to apply for a secured loan , which requires you to pledge collateral like real estate, a vehicle or other valuable assets to secure the loan. By providing collateral, you mitigate the lender’s risk, as they have an asset to claim in the event of default. This added security may make lenders more willing to approve your loan application, even if your income or credit history is less than ideal.in the event of default. This added security may make lenders more willing to approve your loan application, even if your income or credit history is less than ideal.

Seek support as a self-employed borrower

Getting a personal loan when you’re self-employed is a common scenario, and many individuals navigate this process successfully. Remember to evaluate your financial situation and consider the potential impact of taking on additional debt before applying for a personal loan. Take the time to assess your needs, explore alternative funding options and ensure that you can comfortably manage repayments. If you still have questions, reach out to a OneMain loan specialist today to address your personal financial needs and to help you reach your next goal.

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Sources:

1. https://www.investopedia.com/terms/d/dti.asp