Personal loan if you’re self-employed: What to know before you apply

If you're self-employed, congratulations. Not everyone has the nerve or confidence to strike out on their own. Now that you're building a business empire of your own, you're likely to run across a situation or two that calls for an influx of cash. If that's the case, it's natural to have questions about how to get a personal loan when you need one. Here, we'll spell out what you need to do to apply for a loan and how to get around a lack of traditional documents, like W-2s and pay stubs. 

What’s different about personal loans for the self-employed?

Contractors don’t always have the same income verification documents as full-time employees. So a personal loan for the self-employed is one that the lender is willing to consider based on other financial information that you provide when you apply.

If you're self-employed and anxious about how to get a personal loan, it may be because you're unfamiliar with the process. Once you understand how straightforward the process is, you'll likely feel far more sure of yourself. 

A personal loan is a lump sum of money lent to you by a financial institution, such as a bank, credit union, or online lender. You pay the loan back—with interest—in equal monthly installments over a predetermined period of time. Unlike auto loans and home equity loans, most personal loans are unsecured and don't require collateral. Collateral is something you offer the lender as a guarantee that you’ll repay the loan.

When you're self-employed and take out a personal loan, the key word is "personal." It’s not a business loan. You're borrowing the money under your name—not under the name and credit standing of your business. 

How to get a personal loan when you're self-employed 

The process may be slightly different than landing a loan when you have a traditional job, but not different enough to trip you up. Here's the important thing to remember: Lenders want to be sure that loan applicants are well-qualified for the loan they want—and ‌personal loan eligibility is no different when you’re self-employed.

Why you might need a personal loan

Here are some common ways independent contractors use their personal loans:

• Personal loan to consolidate debt

• Personal loan to cover a large expense

Whatever your reason for needing a loan, rest assured that there are great workarounds for scoring a personal loan without traditional proof of income. 

Potential challenges

It may be easier for some folks to pull together the necessary documents than for others, depending on how organized they are. Here are a handful of other potential challenges:

• Lack of traditional income verification documents (such as recent pay stubs)

• Not being in business long enough to have a track record

• Having a lower credit score

We'll walk you through what you'll need to get the loan process rolling.

Overcoming obstacles

Obstacles are like mountains to be climbed. The ascent is tough, but the view from the top makes it all worthwhile. Here's a quick rundown of ways to get over personal loan hurdles with grace:

Lack of traditional income verification

Think about any documents you have to show that you have a reliable income. For example, your most recent two or three bank statements and last year’s tax return. 

It's worth noting that some lenders offer no-income verification loans, and while that sounds good, there's a reason most don't. Lenders want to verify that you can afford to make the monthly payments on the loan you want. If the lender doesn’t look at your income at all, they are taking on more risk that you could default on the loan. Expect them to charge you for that risk, in the form of higher fees and interest.

Owning a new(ish) business

Let's say you've only been self-employed for six months but need to borrow money. Because this personal loan is in your name and not the name of the business, the lender will look at your personal ability to repay the loan. It's not the age of your enterprise that matters as much as your history of borrowing and repaying money. 

If you haven't been in business long enough to demonstrate a long-term, steady income, don't give up. Instead, show the following:

• Your credit standing. It must meet the lender’s minimum requirements. 

• Your employment history. If you've steadily worked through the years, the lender could get a better sense of how likely you are to maintain financial stability.

• The documentation listed in the section above. Bank statements and tax returns help lenders determine whether repaying a loan would be a burden or a breeze. 

A low credit score

A fair credit score (580-669)  should put you in the best position to apply for a personal loan. Achieve requires a 620. If you're not quite there, you may want to consider taking steps to improve your credit standing. Here are some strategies that could lead to quick improvements:

• Order a copy of your credit reports from annualcreditreport.com. If you find errors, follow the instructions to dispute any item you think is wrong. It’s easiest to do this while you’re viewing your credit report online. Some errors can affect your score.

• Pay off outstanding collection accounts.

• Pay off credit card debt or ask your credit card issuers to raise your credit limits. Both of these could help you lower your current credit utilization rate. Higher credit utilization hurts your credit score, so lowering it could help you.

While it is possible to secure a personal loan with a low credit score, do yourself the favor of raising your score if yours is holding you back. You have a lot of exciting adventures ahead of you, and building a healthy credit profile now should only make it easier to get the credit you need in the future. 

Applying for a personal loan online

Here are four reasons why applying for a personal loan online could make sense for you:

1. It's a streamlined way to apply for a loan from wherever you happen to be.

2. You can apply directly online. If you're pre-approved, you can wrap the application process up online as well.

3. If the purpose of your loan is to consolidate debt, your lender may be willing to pay your other creditors directly after your loan is approved. 

4. An added benefit of online personal loans for self-employed individuals and others is flexibility. For example, Achieve Personal Loans offer unsecured loans with flexible documentation requirements because as a leader in digital personal finance, we break rigid, old-school lender molds and meet you right where you are. 

Is it possible to get a personal loan without traditional proof of income?

Absolutely. We walk self-employed applicants through the loan process every day, helping them gather the documents they'll need to take the place of traditional proof of income.

What kind of documents do I need as a self-employed individual to apply for a personal loan?

The following documents are an example of those that give lenders a clear picture of your financial situation:

• Last year's personal tax return. Be sure to include all pages and schedules

• Your most recent bank statements for the last three months

• Social Security number

• Proof of identity

• Additional documents as requested by your lender, such as Schedule K-1 from business tax returns or tax transcripts

How does my credit score affect my personal loan application as a self-employed person? 

You’re more than your credit score. Lenders also look at your income and debt, and why you want the loan. The goal is to find a loan amount, interest rate, and monthly payment that works for your budget and helps you accomplish your goal. 

Your next steps

You don't have to be perfect to secure a personal loan if you’re self-employed. Just be willing to help your lender understand your entire financial picture. If you're in the market for a loan, here are the next steps:

• Gather documents showing your income

• Work on your credit score if it's not where you'd like it to be

• Apply for pre-approval by a lender who does a soft inquiry that won’t hurt your credit score

• If pre-approved, decide whether you'd like to finish the application process via email or by working with an agent

• Once your loan is approved, get your funds, usually by direct deposit to your bank account 

As someone who follows your own path, you're used to thinking outside the box. Chances are, applying for a personal loan won't cause you to break a sweat.