Self-employed Personal Loans: Flexibility and Options Explained

Can You Get a Personal Loan If You’re Self-Employed?

Yes.

But the process may be different, though not necessarily difficult. It’s a question of what risk is involved with lending money to you. This happens in underwriting, where the lender examines your debt, financial status, credit reports, and more.

Why would you want to take a personal loan? There are many reasons self-employed individuals do this.

These include:

● Wedding expenses

● Medical expenses outside of insurance coverage

● Vacations

● Home renovations

● Paying off other outstanding debts

● Education

Often, the lenders will want to add to the loan requirements. For example, some may want you to have an employed co-signer that will provide them more assurance.

Others may require collateral or change the loan terms to balance it. You’ll find that self-employed loans are more forgiving, though you’ll still have to do research to ensure it’s the right one to take.

1. Secured

Secured loans have protection from an asset. It’s the most common self-employed loan to offset the risk as you’re giving collateral. The item must be of significant value for the lender to accept.

Some popular choices include:

● Car

● House

● Stocks and bonds

● High-value collectibles

The lender will hold on to a paper confirming the item’s ownership until you pay off the loan. That means they will have the deed to the house or the documents to your car. If the loan defaults, they will sell the property as collateral to pay the losses.

Many self-employed individuals seek loans because it allows them to borrow more money. Lenders are only comfortable releasing a lot of money if they know there’s something to cover them in case of a loss.

The asset provides security to them, showing your intent to pay the loan. You’ll find many secured loans from lenders, such as mortgages or auto loans.

2. Unsecured

As the name implies, an unsecured personal loan is the opposite of a secured one. There is more of a risk for lenders because they will not be able to recover anything with a default. Unsecured loans often have higher interest rates to offset this risk.

Many people seek unsecured loans first because they’re not comfortable with the idea of providing collateral. They’ll only seek secure loans when they know they no longer have the option to go after an unsecured one.

Applying for an unsecured loan means carefully examining the risk involved when lending to you.

These include:

● The time needed to pay the loan

● Your credit score and employment history

● Liquid money and value of assets

● Income sources

Unsecured loans are more common than you think. Most people will encounter credit cards and student loans, which are unsecured loans.

Most personal loans fall under unsecured loans because the borrower isn’t usually seeking large amounts. It’s rare for lenders to ask for collateral in these cases, but it can happen.

3. Fixed Rate

A fixed-rate loan refers to the interest rate. Depending on your loan’s structure, it could have this rate. No matter what happens to the market or the current environment, a fixed-rate loan assures that you’re paying the same amount for the entire term.

Borrowers often seek this first because it’s easier to compute payments. It’s also highly advantageous if you enter the loan in a low-interest environment.

However, the drawback is that your loan will never go lower than what you’re paying for it now. You sacrifice flexibility for assurance.

4. Variable

A variable interest rate means the amount you’ll pay will change regularly based on the market. Lenders usually follow an index like the federal funds (current interest rate). These loans have many benefits attached upfront, and it can feel good when you pay lower amounts during falling interest periods.

However, the issue is that you’ll always have to be aware of the payment you’ll need to make before spending anything. You don’t want to risk missing a payment or being late because you didn’t compute the higher interest rate.

There is a lot more risk involved, but variable loans usually cost less over the loan’s life.

Here are some of the most common features to look for when seeking a loan:

Flexible Repayment Schedule

You want lenders that offer you repayment that isn’t on a fixed schedule. That way, you can have some leeway as you work your way towards making payments on leaner months.

Depending on the contract, lenders can give out conditions where you’re free to pay within a time frame.

Extra Repayments

Money can always come in irregularly, which means that there might be times you want to pay more than the monthly debt payments. You’ll need an agreement where you can have extra repayments so you can hit the principal early.

The lender must be open to these conditions, or you’ll be stuck with the loan for the long-term.

Redraws

The redraw allows you to take money from extra repayments you’ve made if you need them. It is perfect for the self-employed because circumstances can change fast. You want to have quick access to your money.

Early Repayment or Break Costs

Having an early repayment option means you can complete the loan at an earlier date. For example, you can pay off a three-year loan in half the time.

Doing this means there might be a break cost or a fee you need to pay to complete the loan, as the lender will not be getting the amount they expect from it.

Speed

Speed is vital when you’re self-employed. You’re likely always on the move, and the need for cash can come fast. You want a lender that can respond and process the loan quickly.

Applying for any type of loan can be stressful with all the requirements you need to submit.

When you are self-employed, the process can even be more challenging.

A personal loan when you are self-employed can be used for almost any purpose, lenders will need solid proof of income before approving your loan application.