Why is it harder for self employed to get a loan?
Being self-employed has a whole range of extended benefits! Taking the plunge towards self-employment means you can be your own boss, choose your workload and control your own schedule! But how can being self-employed affect your ability to get approved for loans and finance? Generally, it can be more difficult to get a loan. Many self-employed workers tend to have varied income each month and this can make them more of a risk to lenders. However, there are a few ways in which you can help yourself get approved and there are loans which can be more suited to self-employed workers.
Types of loans for self-employed workers
Personal loans
Personal loans are a type of loan which can be used for pretty much anything. You can usually benefit from low rate car finance when considering a personal loan and it’s a form of unsecured loan. This means that you don’t have to put any collateral against it to get approved e.g., your house when getting a mortgage or your vehicle when getting car finance. Personal loans can be more suited to people with good credit scores but can be easier to obtain for self-employed workers.
Secured loans
Secured loans are secured against an asset that you own such as your home or your car. This means that if you fail to make repayments, finance lenders have the power to take the asset away from you. Secured loans can be a good option for self-employed workers as lenders have more security of you don’t pay. If you don’t have the documented income or employment history, secured loans can be easier to obtain than other options available.
Guarantor loans
A guarantor loan is when a friend or family member agrees to guarantee your loan. This means if you fail to meet the repayments, your guarantor will be liable for making the repayment. If you both fail to pay, both of your credit files can be affected. Interest rates can be slightly higher as there is more risk that it may not be paid back but it can be easier to get approved.
How to get a loan when self employed
Usually if you are self-employed, the approval process works the same, whether you’re applying for a mortgage, car finance or van finance. However, you may find yourself with varied income or job instability, which can be an issue for some lenders. There are a few ways in which you can increase your chances of getting a loan when self-employed.
Increase your credit score. As mentioned above, lenders do take your credit history into account. This is because they want to know whether you could pay back your loan or not, based on your past ability to handle credit. Usually, people with better credit scores find it easier to get approved and can get offered better rates.
Prove your affordability. Lenders want to see how you can afford to pay back your loan. If you’re self-employed, you may have varied income or receive cash in hand. Lenders will usually require 3 months bank statements to prove your incomings and outgoings. If you get paid cash in hand, its recommend that you deposit this into a UK bank account to show your income. If you have high levels of existing debt, it’s also recommended that you try to clear this first before you take on anymore finance.
Save up for a deposit. Having a deposit to put down for a loan or finance deal can be beneficial to both you and the lender. A deposit can help you get approved because it shows good financial management. It also reduces the amount you need to borrow from a lender. This in turn can reduce your monthly payments and interest rate.
Get your documents in order. When you apply for finance, there are a few different types of documents you will need to provide. Having your up-to-date trading accounts can help give lenders a clear picture of how you can meet your repayments. Lenders will usually also check the electoral roll to verify your address and also ask for proof of a full UK driving license.
