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What loans can you apply for when you're self employed?

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Getting a loan when you are self-employed can be tricky, but it’s not impossible. Here's everything you need to know including which options are available and how to maximise your chances.
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Ever since the financial crisis, banks and lenders have become more stringent about who they lend to, with strict affordability criteria in place This has made it more difficult for people who are self-employed to get approved for loans as their income tends to fluctuate each month.

Do lenders offer loans for self-employed people?

The simple answer is yes. While your options may be limited, there are still several options for self-employed people to get a loan if they have a good credit history, can satisfy the lender's requirements for affordability and provide the documents to support it.

Types of loans you can apply for if you're self employed

Personal loans: You can apply for this type of loan without needing to secure the amount you're borrowing with any assets you own. You will need a good credit record if you want a self-employed personal loan.

Secured loans: If you don't have the employment history or documented income to get an unsecured personal loan, you may want to consider a secured loan. This is a type of personal loan that uses the equity you have in your house as security against the cost of the loan, and generally offers a lower rate than a regular personal loan. 

Guarantor loans: If you're finding it difficult to get a loan, another option is to apply for a guarantor loan. This is when you get a third party, such as a friend or family member with a good credit record, to act as a guarantor for the loan. This means that if you miss any repayments or are unable to repay the loan, it falls on the guarantor to make up the shortfall. This might make it more likely for you to be approved, but be aware that interest rates on guarantor loans tend to be higher than standard personal loans. You also need to make sure you make all the repayments on time, or risk falling out with your friends and family.

Business loans: You can apply for this type of loan if you need the funds to support your business. The lender will check your business accounts to help them decide whether to lend to you.

How to apply for a loan if you're self employed

Applying for loans when you’re self-employed is just like applying for any other kind of loan. Here are the steps you need to follow:

  • Gather your financial documents: As someone who is self-employed, it's vital to have all your financial documents concerning your income to hand. These will be necessary for lenders to assess your eligibility for a loan. You’re likely to need bank statements to prove how much you earn. If you’re a limited company you should also gather payslips and show how much you are paid in dividends each month. 

  • Check your eligibility: Most lenders now offer you the option to check your eligibility for a loan, without it affecting your credit score. These soft checks are great, as they mean you can rule out loans you’re unlikely to be approved for and concentrate on options where you have a high chance for success. Getting rejected for credit goes on your credit file and may make other lenders wary, so it’s good to do your research and use soft checks before applying to avoid this. 

  • Compare loans: It's always important to compare loans from different lenders to find the best deal that suits your needs and your affordability. Check the interest rates you’ll be offered as well as how long it will take you to repay. Make sure you’ve considered other borrowing options such as 0% credit cards, which could be cheaper overall.

What documents do you need to apply for a loan when you are self-employed

Different lenders may have their own requirements for what you need to apply, but there are some things that almost all lenders will want to see. Make sure you gather these before you apply. They include:

  • Proof of ID: This can be your driver's licence or passport

  • Proof of address: Copies of council tax or utility bills are usually acceptable.

  • Tax returns (SA302): Being self-employed, you are required to self-file, so once you've submitted your tax returns, you can simply log into your HMRC online account and download your SA302 calculation. You should be able to produce copies of your SA302 calculation for at least the last two years to help prove the income that you declare as part of your application.

  • Bank statements: These are likely to be requested so that the lender can corroborate the earnings shown in your SA302 calculation, and get a picture of your overall financial position (regular income and pattern of outgoings).

  • Proof of any rental income: This should be declared with evidence provided, again through your bank statements or mortgage documents and statements. You may need to produce any lease/tenancy agreements.

  • Company/business information: This can include the status of the business (sole trader, partnership, limited company, etc), and details of anyone other than yourself with a financial interest in the business.

Will a loan cost me more because I'm self-employed?

If you have a good credit record and can satisfy all of the lender's affordability requirements, with documentary evidence, there's no reason why you wouldn't be offered the same rates as a standard personal loan.

However, if your credit rating is less than perfect, or the lender has any concerns, it’s possible that you will be given higher interest rates.

Can I get a self-employed loan if I have bad credit?

Anyone with a bad credit rating will find it difficult to get a loan, regardless of whether they’re full-time employed or work for themselves. But just because it’s harder, doesn’t mean it’s impossible. You'll find that fewer providers will be willing to lend to you, and you won’t get the best rates on the market. You might also find that you are only accepted for a lesser amount than you need. Shopping around and researching before you apply will give you the best chance of getting a deal that works for you. 

Compare loans for people with a poor credit history

What can you use the money for?

There are lots of things you can use loan money for, from buying a car or funding a wedding to home improvements and debt consolidation. As part of the affordability checks, the lender will typically ask you what you plan to do with the money.

There are, however, some limitations on what you can do: 

Personal loans: 

  • Some lenders will specify that you can’t use a person loan for business purposes such as starting a new company. Instead, they’ll ask you to explore a business loan

  • If you want to buy a home, it’s usually a bad idea to take out a loan to get a deposit together. When you apply for your mortgage, the lender will ask how you funded the deposit, and a loan could impact the decision

  • Taking on a loan to pay household bills is rarely a good idea, and may suggest you’ll struggle to make the repayments

When your lender asks what your loan is for, make sure you answer honestly so they can tell you if you can use the money for its intended purpose.

Business loans: 

If you want to use a business loan for personal use, you may need to secure what you borrow to your business, e.g. a work vehicle.

Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.

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