If you are self-employed, it is still possible to borrow money, but the loan application process can be a bit difficult. The main reason for this is that you don’t get pay stubs or W-2s from an employer, so it’s a bit more difficult to demonstrate that you’re making enough money.
Can I take out a loan if I am self-employed?
Being self-employed can complicate the process of getting a loan; however, it is still possible. Lenders will need to review an individual’s credit and income before approving a loan to determine a borrower’s creditworthiness and likelihood of repaying their loan on time. If you are self-employed, you will not get a W-2 from an employer; however, here are some ways to demonstrate your creditworthiness if you are self-employed:
It’s relatively common for lenders to ask to see tax returns as a way to verify your income, instead of pay stubs or W-2s. Depending on the lender, they may ask for several years of documents; Generally speaking, you will need to be able to submit at least two years of tax returns or transcripts. Additionally, lenders might also ask to review your net profit or net loss rather than just your gross income.
Lending to a self-employed borrower may be considered a greater risk for lenders than lending to a borrower who works full time. To counter the risk, the loan offered to a self-employed person can be a “secured” loan. This means that the loan is secured by collateral – normally a property, car or certificate of deposit that the lender can repossess if you fail to repay the loan.
Lenders may ask to see several weeks of bank statements; it’s a way for them to check your outgoing expenses against your income. All of this information will help a lender determine whether or not you can afford to repay your loan and track monthly repayments.
Another action that can improve your chances of getting approved for a loan is to apply with a co-signer. This could be especially helpful if you have poor credit or don’t meet some of the loan requirements yourself. The co-signer will also be responsible for any refunds and, by signing, agrees to pay any payments that you may not be able to make; this makes the transaction less risky for lenders.
Loan alternatives if you are self-employed
Different options are available to you if you are self-employed but do not wish to take out credit.
Credit cards and cash advances
If you are unsure about taking out a loan, or for some reason cannot be approved for a loan, a credit card may be a good option for you. When used responsibly, credit cards can help boost your credit score and build a positive credit history; all of which will make you more likely to be approved for a loan in the future. Plus, depending on the card you choose, you could qualify for airline miles, rewards points, or cash back that could help you save money in the long run.
With a credit card, you may also have the option of a cash advance – this is a short-term loan that allows you to withdraw money from your credit card account. This usually results in a higher APR than credit card purchases, but can be a good way to get cash funds in the short term.
Home Equity Loans
If you are a homeowner, another option for borrowing money may be to take out a home equity loan or a home equity line of credit (HELOC). The difference between a home equity loan and a HELOC is that the loan works with fixed payments, while a HELOC means you only make payments on the amount you borrow. To sign up for a home equity product, you may need to verify your self-employment income by showing recent tax returns, but since you’re borrowing against your home equity rather than a lender, it’s generally easier to get approved.
This is a sponsored feature