Qualifying for a personal loan involves borrowers proving they have a reliable source of income. Unfortunately, this requirement can seem like bad news to self-employed individuals whose revenue streams are frequently inconsistent.
If you are experiencing this dilemma, no need to worry. Although you have to present more documents that serve as evidence of your income and financial status, you can still take out a loan as a self-employed person. To have an easier time throughout the loan application process, use this article as your guide.
What Is the Purpose of a Personal Loan?
A personal loan can serve different purposes. It can be used to pay off pending debts, finance commercial property renovation projects or medical expenses not covered by insurance, or even spend on the latest business equipment. But before applying for a loan, borrowers need to determine their ability to make payments.
What Should Self-Employed Workers Prepare for the Loan Application Process?
Regular workers who are applying for a loan can prove their income with only a payslip. However, that is not the case for self-employed individuals. The documents to be filled out for a self-employed loan will vary depending on the lender’s requirements and the borrower’s type of work. Listed below are the documents they need to provide their lenders:
1. Bank Statement
A bank statement may be needed when applying for a loan, except for unsecured loans that do not require a down payment or collateral. This document shows the credit history and the consistency of the income.
2. Tax Returns
A copy of at least two years of signed tax returns is necessary to give lenders detailed information on the income over a longer period. Other tax forms like the 1099-MISC Form and Schedule C and SE should also be provided.
A 1099-MISC form is required of independent providers and contractors of legal and medical services who have received a payment of six hundred dollars. On the other hand, the Schedule C and SE documents will be used to determine the amount and consistency of the income.
Will a Loan Be More Expensive for Self-Employed Workers?
Generally speaking, lenders prefer applicants with consistent income. Because of this, self-employed applicants tend to face higher interest rates than salaried workers since they are considered higher-risk loan candidates. To help them qualify for a lower interest rate, they must consider using a cosigner.
On the other hand, loans for self-employed individuals aren’t necessarily more expensive than loans for regular workers. After all, every lender has their own way of assessing applicants’ financial standing. For instance, self-employed loan applicants may not be penalized if they have good credit if their lender focuses more on credit score than income.
Self-employed individuals worry about having their small personal loan application approved. Compared to salaried workers, their income is often unpredictable. However, they can still qualify for personal loans, especially if they have good credit. They can even avoid getting penalized by lenders as long as they have the proper documentation. They just have to do thorough preparation by following this guide.
To get the funds you need as a self-employed individual, start preparing for applying for our installment loan. At Magnolia Finance, we offer different loan sizes that fit all kinds of needs. Contact us at 901-381-9095 for inquiries!