- Before lending you money, lenders typically review your credit, income and other factors to assess how likely you are to pay the loan back on time.
- When you’re self-employed, proving you have a steady income stream and can make on-time payments may be a challenge.
- However, this doesn’t mean you’re out of luck when it comes to applying for a personal loan. Here’s what you need to know about loans for the self-employed.
Reviewing Credit and Income
Before lending you money, lenders typically review your credit, income and other factors to assess how likely you are to pay the loan back on time. But when you’re self-employed, proving you have a steady income stream and can make on-time payments may be a challenge.
In lieu of a W-2s or pay stubs, some lenders may request several years’ worth of tax returns or tax return transcripts to verify your income. A tax transcript is a document from the IRS with financial information that’s on your tax return, such as your adjusted gross income.
Keep in mind — lenders may review your net profit or loss and not just your gross income. So, if you bring in $75,000 annually as a self-employed graphic designer, but your net profit is adjusted to $60,000 after expenses, the lender may decide whether to approve you based on the $60,000.
Getting a personal loan without a good credit score can be tough, especially if you’re self-employed. You can check your credit score for free online or through your credit card provider. When applying for a personal loan, shoot for a score of at least 610; however, a score over 720 will yield the lowest interest rates.
Documentation and Identification for the Loan
Personal loans for self-employed people generally require more paperwork since your employment situation is more unusual. It’s a good idea to round up this paperwork ahead of time to ensure a smooth application process with your lender.
Each lender has its own personal loan requirements for which documents you’ll need to submit. But in general, it’s a good idea to gather these files ahead of time:
- Tax statements (tax transcripts, returns or schedules).
- Bank statements.
- Profit & loss statements.
Most lenders will want to see at least two years’ worth of income documents because they want to see a pattern of consistent income. The longer you’ve been self-employed and earning a semi-consistent income (and can show it), the better your chances are of qualifying.
Since lenders differ so much on their policies for personal loans for self-employed people, it’s especially important to shop around. Some lenders offer a prequalification process that lets you see whether the lender is likely to approve your loan and what terms you may qualify for before submitting your application. When you prequalify, make sure that the lender does a soft credit check to protect your credit score.
If you’re self-employed and considering a personal loan, the first step is checking your budget to see what you’re able to spend on a monthly loan payment — you don’t want to get approved for a loan and realize you’re in over your head.
The next step is comparing loan options from multiple places, including banks, online lenders and credit unions. Shopping with multiple lenders can help you find a product with the most competitive terms and fees.
It’s possible to get approved for a personal loan when you’re self-employed, but lenders will likely put your finances under a microscope to make sure you earn enough income to keep up with payments.