How To Get A Personal Loan When Self-Employed

April 20, 2021

There’s plenty to love about being self-employed. You are your own boss. You decide when you want to work, and you answer only to yourself. But, there can be drawbacks as well. Accessing credit, for example, can be tricky. Credit providers want to know you will be able repay what you borrow, which means jumping through a lot more hoops when you apply.

So, what can you do to improve your chances of being approved if you’re self-employed and you want to apply for a personal loan? In this post, we’ll take you through the seven steps to approval, to then look at some tips that could help you along the way. And if all else fails, we’ll check out a few alternatives you can look into if it looks like a personal loan won’t be an option for you.

Assessing Your Risk

Before we get into the seven steps that will guide you towards approval, let’s find out more about why it’s harder to get approved for a personal loan when you’re self-employed.

Essentially, it all comes down to risk. When you apply for a personal loan, the lender wants to know you are capable of paying back the sum you want to borrow, plus any fees and interest the lender chooses to apply. That means checking out your income, both in terms of the amount you have coming in, and how stable the source of that income is.

Say you’re employed in a full-time, permanent salaried position, and you’ve been in that job for a few years. Your outgoings aren’t overly high, and you have a good credit history. Taking all that information into account, the lender would likely assess you as low risk, determining you are more than likely to be able to make your repayments thanks to steady employment and a sufficient income stream.

What if you’re self-employed? While you may feel secure in your role as business owner, the lender may label you as higher risk. Unlike an applicant who is salaried within a permanent position, your income stream may vary month to month. Or it may be higher at certain times of the year, and lower at others.

There’s also the possibility that your business could fail. According to the Australian Bureau of Statistics, 60% of small businesses fail within the first three years of operation.

With that higher risk label, it can be harder to get approved for a loan – but, it’s not impossible. By choosing the right loan and the right lender, by providing evidence that lowers your risk while demonstrating your ability to repay what you owe, you can get approved for a personal loan when you’re self-employed.

7 Steps to Approval When You’re Self-employed

Now, let’s get into those steps.

Step 1. Check Your Credit Score

Improving your chances of getting approved for a personal loan when you’re self-employed starts with demonstrating your low risk status to the lender with a great credit score.

Before you apply for any form of credit, you should always check your credit score. Each of Australia’s three main credit reporting agencies make this process pretty easy. Apply for a copy of your credit report and credit score from illion, Experian and Equifax, then read through each report carefully.

Why do you need to check your report with each agency? When you apply for a personal loan, you don’t know which reporting agency the lender will use to check your credit report. If the lender accesses your report through an agency you didn’t check in with, you won’t know what that report says about you – and if there are any errors bringing your score down.

TIP: If you find any errors within your credit report, you can apply to the reporting agency to have them corrected. You may have to provide documentation to back up your claim, but the process is free. After the errors have been corrected, you should see a correlating upswing in your credit score.

One of the things lenders look for when assessing an applicant is their demonstrated ability to handle credit correctly. If your credit report shows you have a history of making your repayments on time, while avoiding missed payments and defaults, that should go a long way towards lowering your risk in the eyes of potential lenders.

And if your credit isn’t great? If you’ve made mistakes with credit in the past – or perhaps not had many interactions with credit – getting a loan when you’re self-employed will be more difficult. You may need to take time to improve your situation, while building up your credit, before you apply.

Step 2. Choose the Right Loan

If you’ve spent any time comparing personal loans, you’ll know that there are plenty of options to choose from. But, not all loans will be appropriate for you as a self-employed applicant.

When it comes to standard personal loans, you will find that the vast majority allow self-employed applicants to apply. Bear in mind you may have to provide more documentation to back up your application, and there is the possibility you will pay a higher rate on your loan if the lender deems you high risk.

There other options as well, however. You might want to check out specialist loans provided by lenders than specialise in loans for self-employed people. P2P loans – or peer-to-peer loans – could offer another alternative, as could low doc loans. With a low doc loan, you don’t have to provide as much documentation, but you will usually pay more for the loan in fees and interest.

So, what should you look for in a loan? Let’s say you opt for a standard personal loan. One of the biggest decisions you will make regards whether you will go for a secured or unsecured option.

With a secured personal loan, the loan is secured against an asset. If you’re buying a car, for example, the loan may be secured against the car you buy. If you’re looking for funds for any other purpose, you may choose to secure your loan against your home. There are two major benefits of choosing a secured loan.

By putting up an asset as collateral, you lower the risk for the lender. As a result, the lender will typically reward you with:

  • A lower rate. Rates on secured loans are usually lower than rates on unsecured loans. This can reduce the cost of the loan, giving you a more affordable repayment schedule, as you pay back less in interest.
  • Easier approval. Perhaps more importantly for self-employed applicants, secured loans can be easier to get approved for than unsecured loans.

TIP: By lowering the risk for the lender, you increase the risk for yourself. If you fail to repay what you owe on a secured loan, the lender is within its rights to repossess that asset and sell it off to cover the remaining amount owed. As with any loan, only apply if you know you can pay it back.

Another important consideration when choosing a loan involves checking eligibility requirements. While most standard loans allow self-employed applicants to apply, some don’t. Read the small print or contact the lender if you’re unsure. Also find out what documentation you will have to provide, and make sure you have it available.

Lastly, think about the amount you want to apply for. Consider your financial position carefully, and work out how much you can afford to pay back each month. The lender will need to determine whether lending to you will cause you financial stress, so it’s important to make sure the loan you apply for is actually affordable.

Credit World Australia - Choose a personal loan you can afford

Step 3. Shop Around

Now you know which loans you can apply for, it’s time to narrow your options by comparing what’s on offer. Here are some factors to consider as you compare loans side by side.

  • Fees: Most personal loans charge an establishment fee, an ongoing fee, or both. When weighing up loans, take into account how much it will cost in fees overall. You may find loans that offer more flexibility and features charge more in fees. Traditional lenders also tend to charge more in fees than online lenders.
  • Interest: Decide whether you want a fixed rate or variable rate on your loan, and then compare rates. Opting for a fixed rate may be more appealing, as you will always know what your repayments will be. However, fixed rate loans can be less flexible, charging high break costs should you want to pay off the loan early. Bear in mind the rate advertised may not be the rate you get. You will be approved for a rate based on your loan amount, loan term and creditworthiness.
  • Loan Term: Personal loan terms can range from one to seven years, depending on the type of loan. Decide how long you will need to repay your loan, using a personal loan calculator to create a repayment schedule that fits your budget.
  • Loan Amount: While personal loan amounts may range from $1,000 to $80,000, depending on the lender, the amount you’re approved for will depend on your financial situation. You may find you can borrow more on a secured loan than an unsecured loan.
  • Features: Personal loan features can create more flexibility within the loan. As an example, the loan may allow you to make extra repayments without penalty, allowing you to pay down the loan faster as you pay less in interest. Another appealing feature could be a redraw facility, providing you access to those extra repayments when you need them.
  • Turnaround Time: Some personal loans offer same day access to funds, while others take days or even weeks to process. Secured loans and loans that require more documentation can take longer to process, so keep this in mind when comparing options if you need your funds within a certain amount of time.
  • Application Process: Each lender has its own application process, which may alter according to the type of applicant. As a self-employed applicant, it may be worth asking the lender what will be expected of you during the application process so you can prepare yourself and your required documentation.

Once you’ve compared your options and narrowed your search, you may choose to apply for preapproval. Using a soft pull on your credit report, this process can give you an idea of how much you can borrow based on your income, spending, assets and liabilities, based on your current financial position.

Step 4. Choose a Lender

If you opted to apply for preapproval, your job of comparing loan options should be a bit easier. Now though, it’s time to look past the loan to the lender.

For the most part, when you apply for a personal loan as an employee, you don’t really consider the lender. You want a loan, you want a low rate, and that’s about it. When you’re self-employed however, you need to look at the wider picture, which means looking at the way the lender operates.

Due to the sometimes unpredictable nature of being self-employed, it may help to look for a lender willing to be flexible, that also thinks outside of the box. A lender that perhaps offers flexibility regarding repayment periods, or even repayment holidays. A lender that is willing to recognise alternative sources of income, or alternative documentation on application.

Customer service is also a crucial element. It’s worth checking reviews to find out what kind of customer service each lender offers before you apply. You may require more interaction with your lender than a typical applicant, for example to discuss any changes to your circumstances over the loan term. Make sure the lender is available for those discussions, and that previous borrowers have had good outcomes.

Step 5. Gather the Required Documentation

Applying for a personal loan when you’re self-employed usually means providing more documentation than you otherwise would. Again, this is about determining risk.

By assessing evidence of your financial circumstances, the lender can use that information to determine the likelihood of you being able to consistently make your repayments should you be provided with a loan. If you are able to prove a consistent income stream over two years or more, this should increase your chances of being approved.

While each lender will have different requirements regarding the information you will need to provide as a self-employed applicant, here is a rough guide of what you may need to dig up.

  • Tax Returns. Lenders typically ask for tax returns for the last two years. Backing up the income you declare on your application, these may include your personal and/or business returns.
  • Notices of Assessment. Alongside your tax returns, you may also have to provide the notice of assessment provided to you by the ATO for the previous year/two years.
  • Financial Statements. These may include any profit/loss statements to further support the income you declare.
  • Recent Bank Statements. You may be asked to provide three to six months of bank statements, outlining your personal and business spending. You may also have to provide statements or a balance showing the amount owing on other loans and credit cards in your name.
  • Proof of Rental Income. If you have any income from rental properties, you can provide evidence of this with real estate statements or copies of your executed lease agreements.
  • Personal Identification. To prove you are who you say you are, you will have to provide proof of ID. That may mean providing the lender with a copy of your passport, Australian driver’s licence or proof of age card.
  • Company Info. You will need to provide details of your business, including your trading name, your company’s ABN and address.

Step 6. Apply

Once you’ve gathered all the paperwork you think you will need, it’s time to apply. Most lenders that provide self-employed personal loans offer online application, cutting down the time it takes to apply. With that being said, it’s ever-important to take time to read through each question asked of you, and to be honest in your answers.

Depending on the lender, you may also choose to visit a branch to apply, or carry out your application over the phone. With more involved applications such as these, some lenders may allow you to start the process by applying online, to then call or visit a branch to complete the application. You will then need to email, fax or post copies of all required documentation.

TIP: The lender will carry out a hard credit check as part of this application process. This will ding your credit score slightly, so it’s important to make sure you only take an application this far with a loan you actually want to apply for – and also, when you know you will likely be approved.

How long will it take to receive a decision on your loan? While the lender will likely confirm receipt of your application and documentation straight away, you may wait a few days or more regarding a decision on approval. Before giving you an answer, the lender may come back to you with a request for further information and/or documentation.

Step 7. Repay Your Loan

Once your loan has been approved, the lender will send you a loan contract, which you must sign and return. Read over this contract carefully, as it will contain important info on fees, interest, repayments, and the terms of the loan. If you are unsure about any aspect of the loan contract, ask the lender for clarification before you sign.

From there, the lender will deposit the funds in your nominated account. Use the information provided by the lender to create an online account or access the lender’s app. This should allow you to keep track of your loan and the progress you are making with your repayments, and may also provide access to handy features such as altering your repayment frequency.

Setting up a direct debit to pay your repayments is also a good idea. Doing this, you can avoid the late fees and hits to your credit score that come with missing repayments. Just make sure you have enough money in your account to cover each repayment when it’s due.

Being self-employed, your income may vary from month to month, so try to build up funds you can draw upon to make your repayments during lean periods. You may also have the option to make extra repayments on your loan when you have more money coming in, which you can redraw later when needed to cover either personal expenses or your repayments.

TIP: Some lenders allow borrowers to take repayment holidays when times get tough. If you’re unable to make your repayment, contact your lender before the payment is due to discuss your options. You may be able to take a repayment holiday, or push back your repayment until a time when you know you have money coming in.

Tips for Getting Approved

Unsure your application will be approved? Use these tips to increase your chances of approval.

  • Get a Guarantor. If your spouse, partner, parent or other trusted family member or friend is willing, you could ask them to go guarantor on your loan application. A guarantor basically guarantees the loan, agreeing to repay the loan if you can’t. By choosing a guarantor with steady employment and excellent credit, you could greatly improve your chances of being approved.
  • Create a Joint Application. Another option could be to opt for a joint application on the loan. Ideally, the joint applicant would be a trusted friend or family member who could easily get approved for a loan in their own right. As with a guarantor agreement, you would need to be clear on your ability to repay the loan, as it could affect the other party’s financial circumstances and credit if you fail to repay.
  • Improve Your Circumstances. If you don’t think you’d be approved in your current situation, take time to improve yourself. That could mean building up your business so you can show off an improved continuous income stream. It could mean paying down your debts and building your credit by making all your repayments on time. Building up your savings will also look good to potential lenders, as will keeping a diligent record of your personal and business finances.

Considering the Alternatives

If you can’t get approved for a personal loan and you need access to funds in the meantime, you may need to look at other alternatives. Here are some options you may want to consider.

  • Credit Cards. By being smart with your credit cards, you can access credit while keeping outgoing costs to a minimum. With this option, you should only spend as much as you can afford to pay back at the end of the month, or you’ll get hit with high interest charges. However, used correctly, your cards could allow you to manage your cash flow more effectively.
  • Home Equity Loan. If you have a home loan, you may be able to tap into some of the equity you’ve built up in your home over the years. Accessing a portion of your home’s equity (the difference between the current market value of your home and your remaining home loan balance), you could enjoy easier approval and lower rates. Keep in mind, if you default on your home equity loan, you risk losing your home to repossession.
  • Home Equity Line of Credit. Similar to a home equity loan, a home equity line of credit allows you to access some of the equity in your home. However, with this option, the funds are not provided to you as a lump sum – instead they are offered as a line of credit that you can access as and when needed. Again, your home is collateral on this loan, so you should only borrow what you can afford to pay back.

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