COVID-19 has created an inexorable loop of financial chaos that feels like it’s causing economic turmoil. This sudden economic downturn is affecting all countries. The UK government encourages banks to loan large amounts of money. The problem is that not many people are able to access these loans. Lending institutions have also tightened their lending criteria, leading to a significant reduction in the number of applicants.
Creditworthiness is a significant determinant of whether a borrower can get a loan. Self-employed individuals will have a more challenging time getting approved for loans. Lenders prefer to see someone who has a steady source of income over someone whose income fluctuates frequently. It may be more difficult now that lenders are stricter. How can a self-employed person get a loan?
This article will explain the various loan options for self-employed individuals.
Is it possible to get a loan for self-employment?
You can still apply for a loan if you are self-employed. Even though your options are limited, chances are you will be approved for a loan if you have good credit and meet the lender’s requirements. Lenders will assess your creditworthiness and ability to pay back the loan, helping you to get loan offers that have better terms, lower interest rates, and a more extended period.
Self-employed people and freelancers looking to bridge financial gaps can get money from many lenders. Lenders will consider your application, even if the applicant is self-employed, as long as they see you have a good credit record.
What types of loans are available?
Here are some loan options for self-employed individuals in need of financial aid:
- Personal Loans A personal loan is an unsecured loan that doesn’t require collateral. A personal loan can be beneficial if you have good credit. You will be able to get a loan term that is feasible and affordable if you have a good credit score.
- Secured Loans A secured loan allows you to use collateral to obtain a loan. Secured loans are often secured by collateral such as their home equity. If you default on the loan repayments, the lender may recoup their losses by selling your property. Secured loans can have a lower interest rate than unsecured loans. This option is available if you don’t have a history of significant employment or income documentation.
- Guarantor Loans Getting a loan can be challenging for those with average credit scores or below. If you have a strong credit history, lenders may approve your loan application. A guarantor can be a friend, family member or close relative willing to sign a loan agreement. They will be obligated to the same loan obligations as you. In the event of default, your guarantor is responsible for loan repayments. A guarantor can help you increase your chances of being approved for a loan. These loans have a higher interest rate than personal loans, so it is vital to keep this in mind.
- Business loans: A loan for your business can be used to fund immediate expenses. You will need to provide your business accounts to the lender to be eligible for a business loan. The lender will then decide whether to lend you money.
Do I have to pay more to get a loan if I’m self-employed or a contractor?
Lenders determine the cost of a loan based on your creditworthiness, affordability, and other factors. Lenders will offer standard rates to you as long as you can show that you have been responsible for your credit and that you can repay the money you borrowed. Good credit history is required for this.
Financial planning for self-employed workers
- Don’t underestimate your expenses: More than 40% of home-based businesses need less than £20,000 to start. There are other costs involved in running a business. Include costs like childcare, insurance, postage and gas in your budget.
- Take control of your income: Many self-employed workers earn sporadic incomes. Calculate your monthly average income to determine how much your income fluctuates from month to month. If you have a month in which you make more than the average, you can put that extra money into a savings account to supplement your less lucrative months.
- Don’t rely on credit cards: Credit card borrowing can quickly turn into a costly problem. You should open a separate account if you are able to use your credit card for business expenses. A small business loan is a better option if you have a startup and need funds.
- You should keep track of your taxes: Self-employed people may be required to pay a 15% self-employment tax, in addition to regular income taxes. Regularly review your tax returns throughout the year to avoid unexpected tax surprises. To avoid over-withholding penalties, make quarterly tax payments.
- Keep accurate records: You must complete all paperwork promptly, especially if you are billing customers or clients. Invoice processing can take up to several weeks for many companies. It would be best to keep copies of all receipts for tax purposes. Networking is essential, so keep your business cards and contact information organized.
You may have had difficulty getting a loan if you are self-employed. Lenders prefer to see proof of income from borrowers than borrowers who are self-employed and have variable income. Although your options are limited, it is possible to obtain approval for a personal loan even if you are self-employed.
It is essential to evaluate the pros and cons of all options carefully. You want to save your money, so make sure you compare all the loan offers before choosing one.