Can You Get a Loan if You’re Self-Employed?
Loans for self-employed workers can be difficult to obtain, but they aren’t impossible. We explain how to apply, where to borrow, and what to do if you have bad credit.
There is no shortage of people that work for themselves in the UK. According to the most recent data from the Office for National Statistics, there are around five million self-employed workers, up significantly from the 3.2 million self-employed workers in 2000.
But while the numbers of people working for themselves has increased, it can still be tricky for these people to get loans.
Why it’s often harder for self-employed people to borrow
When you apply for a loan, the lender needs to be confident that you can afford to pay it back. That, after all, is how they make their money. And one of the ways they will want to establish this is by looking at your financial situation, particularly your incomings and outgoings.
The income of an employed worker is fairly simple to judge, since it doesn’t change month by month. That’s not the case for self-employed workers, who may see their income fluctuate significantly from one month to the next. And that lack of stability can make some lenders nervous.
If you are self-employed, you should still be able to find a loan. However, it may be that you have fewer lenders to choose from.
What loans are available to self-employed people?
If you work for yourself, you can still take out the same types of loan as other borrowers.
For example, you can still take out a personal loan. This is a form of unsecured borrowing ‒ you don’t have to use an asset like a car or house as collateral in case you can’t afford the repayments.
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Equally, if you want to buy a house, self-employed workers can take out a mortgage in much the same way as their employed peers, while if you’re a homeowner and want to borrow more ‒ perhaps for some home renovations ‒ without changing your existing mortgage, then you could go for a secured loan (also known as a second charge mortgage).
How do I apply for a self-employed loan?
The application process itself is not that different whether you are employed or self-employed. If you’re going for a personal loan, you’ll have to fill out the same forms whether you work for yourself or someone else.
This means you will have to provide certain documents such as proof of your ID and proof of your address, just as employed applicants do.
The main difference is likely to come down to proving your income. If you are self-employed, you will generally have to provide some form of evidence that your earnings are what you say they are.
This may mean sharing your business accounts for the last couple of years, or providing your tax returns so that the lender has a little more confidence about the strength of your finances.
Will I pay more for a self-employed loan?
Lenders don’t tend to offer products specifically for self-employed borrowers, distinct from those available to employed borrowers. As a result, if you are approved you should get a similar deal.
It’s important to remember that with certain loans, like personal loans and secured loans, lenders publicise a representative annual percentage rate or APR. This interest rate only has to be offered to 51% of successful applicants, meaning that almost half of those who are approved for a loan may find that they are being offered a higher interest rate than that which they applied for.
This can be down to all sorts of factors that make the lender think you are a little riskier as a borrower, from your credit history to your employment position.
Can I get a self-employed loan if I have bad credit?
There are some lenders who specialise in working with applicants who have a patchy credit record, perhaps because they have missed a payment or two in the past.
These lenders will consider you whether you are employed or self-employed, though it’s worth remembering that these deals inevitably come with a higher rate of interest than the deals offered to borrowers with a flawless credit history.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more