Personal loan if you’re self-employed: What to know before you apply

If you're self-employed, congratulations. Not everyone has the nerve or confidence to strike out on their own. Now that you're building a business empire of your own, you're likely to run across a situation or two that calls for an influx of cash. If that's the case, it's natural to have questions about how to get a personal loan when you need one.

Here, we'll spell out what you need to apply for a loan and how to get around a lack of traditional documents, like W-2s and pay stubs. This guidance is for a wide range of self-employed people, including:

• Gig workers

• Freelancers

• Independent contractors

• Small business owners

Why you might need a personal loan

A personal loan is a lump sum of money lent to you by a financial institution, such as a bank, credit union, or online lender. You pay the loan back—with interest—in equal monthly installments over a predetermined period.

Unlike auto loans and home equity loans, most personal loans are unsecured. This means they don't require collateral, or something of value that backs up the loan.

Here are some common ways independent contractors use their personal loans:

• Personal loan to consolidate debt

• Personal loan to cover a large expense

How to get a personal loan when you're self-employed

The process may be slightly different than landing a loan when you have a traditional job, but not different enough to trip you up. Here's the important thing to keep in mind: Lenders are just making sure that you're well qualified for the loan you want.

What's different about personal loans for the self-employed?

Self-employed individuals don’t always have the same income verification documents as full-time employees. Since the lender still needs to verify that you can afford the loan and are likely to pay it back, you may need to provide different documentation to show you have regular income sufficient for a new loan payment.

Another thing to remember is that for a personal loan, the key word is "personal." It's not a business loan. You're borrowing the money under your name, not under the name and credit standing of your business. And many lenders specifically restrict personal loans from being used to fund business expenses.

What kind of documents do I need as a self-employed individual to apply for a personal loan?

The following documents are examples of those that give lenders a clear picture of your financial situation:

• Last year's personal tax return. Be sure to include all pages and schedules

• Your bank statements for the last three months

• Social Security number

• Proof of identity

• Additional documents as requested by your lender, such as a profit-and-loss statement and 1099 forms

How does my credit score affect my personal loan application as a self-employed person?

For a personal loan, lenders look at your personal credit history and scores. Your approval, rate, and terms could all be impacted by your credit.

You're more than your credit score, though. Lenders also look at your income and debt, as well as why you want the loan. The goal is to find a loan amount, interest rate, and monthly payment that works for your budget and helps you accomplish your goal.

How to get past common obstacles

Here's a quick rundown of ways to get over the major personal loan hurdles when you're self-employed.

You can't provide income verification

A W-2 isn't the only way you can show your income as a self-employed person. You could substitute other forms that show your income, such as your most recent two or three bank statements and last year’s tax return.

Alternatively, while most lenders ask for documentation to verify that you can afford the monthly payments, some offer no-income-verification loans. This might not be as ideal as it sounds, however. Without income verification, a lender is taking on more risk that you could default on the loan. Expect them to charge you for that risk, in the form of higher fees and interest.

Your business is new(ish)

Let's say you've only been self-employed for six months but need to borrow money. Because this personal loan is in your name and not the name of the company, the lender will look at your personal ability to repay the loan. It's not the age of your business that matters as much as your history of borrowing and repaying money.

If you haven't been in business long enough to demonstrate a long-term, steady income, don't give up. Instead, show the following:

• Your credit standing. It must meet the lender's minimum requirements.

• Your employment history. If you've steadily worked through the years, the lender may get a better sense of how likely you are to maintain financial stability.

• Bank statements and tax returns. Both document types help lenders determine whether repaying a loan would be a burden or a breeze.

You have a low credit score

A fair credit score could still put you in a solid position to apply for a personal loan. A personal loan may also be within reach with a lower credit score. Lenders often weigh your income, financial history, and income stability alongside it.

To strengthen your credit, you may want to consider taking steps to improve your credit standing. Here are some strategies that could lead to quick improvements:

• Order a copy of your credit reports from annualcreditreport.com. If you find errors, follow the instructions to dispute any item you think is wrong. Errors can affect your score, and you may find that having them removed gives your score a boost.

• Pay off outstanding collection accounts.

• Pay off credit card debt or ask your credit card issuers to raise your credit limits. Both of these could help lower your current credit utilization rate. Higher credit utilization hurts your credit score, so lowering it could help you.

While it is possible to secure a personal loan with a low credit score, do yourself a favor and raise your score if it is holding you back. You have a lot of exciting adventures ahead of you, and building a healthy credit profile now should only make it easier to get the credit you need in the future.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Your next steps

You don't have to be perfect to secure a personal loan if you're self-employed. Just be willing to help your lender understand your entire financial picture. If you're in the market for a loan, here are the next steps:

• Gather documents showing your income.

• Work on your credit score if it's not where you'd like it to be.

• Get prequalified with at least three lenders that use a soft credit inquiry, which won't impact your scores.

• Choose the lender with the best rate, fees, and term offer, then apply.

As someone who follows your own path, you're used to thinking outside the box. Chances are, applying for a personal loan won't cause you to break a sweat.

Ready to explore your options? Check your eligibility for a personal loan through Achieve Personal Loans with no impact to your score.