You might have heard it’s trickier to get a loan when you’re self-employed. And you’re probably wondering what type of loan is the easiest to get approved for. That will depend on your circumstances. Learn about the loans you can apply for when you’re self-employed.
If you run your own business for yourself and are responsible for its success, you’re seen as self-employed. You might say you’re ‘a contractor’ or ‘a freelancer’, but essentially, you don’t have an employer who pays your wages and provides perks like holiday and sick pay.
If you have a good credit history, the right paperwork and lenders agree you can afford it, there’s a variety of options. Your choices are more limited if you have a bad credit history.
If you’re looking to borrow money for something personal, such as to buy a car, do some home improvements or go on a special holiday there are various options open to you. These include:
Unsecured personal loans. This is a straightforward arrangement to borrow a specific amount of money over a set time period and make fixed monthly repayments. It’s the simplest option if you have a good credit rating.
Secured loans. If your credit history could be better, you haven’t been self-employed for long, or can’t prove your income, a secured loan could work. It means you put something up as ‘collateral’ – an asset the lender would take ownership of if you failed to keep up the payments such as your home or car.
Guarantor loans. Here, you ask someone to guarantee they’d step in and pay if you can’t. It could be a family member or friend with a good credit history, but bear in mind it could cause disagreements or damage relationships.
It’s worth noting that if you want to borrow money to start a business or for something related to your work, you might be able to use one of these loans. But a bank or lender will probably suggest a business loan.
With business loans you can sometimes borrow more thank with other loans, and it can be cheaper. The options open to you will depend on the type of business you have.
Sole trader loans. These are for people who work by themselves and have full financial responsibility for their business.
Partnership loans. If two or more people share responsibility for a business, the partnership can take out a loan. Each partner’s liability depends on whether you’ve set up an ‘ordinary’ business partnership, a limited partnership or a limited liability partnership.
Limited company loans. If your business is set up as a company, it’s the company that borrows money and is legally responsible for any debts.
These loans can be unsecured, secured or guarantor loans.
You can apply online. You’ll need to fill in an application form and provide evidence about your finances. You can usually check how likely it is you’ll be approved before completing the form. And you can email or upload scans of the documents the lenders need. You can apply in-person if you’d like to get help with the process.
It's important to compare different options so you get the right deal for you. And remember there are other ways to get finance, such as credit cards or leasing deals.
You’ll need to prove you’ll be able to afford the payments. Lenders will probably need to see records for at least two years, depending on the type of loan. They’ll need to know whether you’re a sole trader or have set up a partnership or limited company. They’ll want to know if anyone else has a financial interest, whether you have other debts and about your employment history. Here are the documents to get together:
Proof of ID. Your driver’s licence or passport.
Proof of address. A recent utility bill, Council Tax bill or bank statement.
Accounts and/or tax returns. The self-assessment tax return system allows you to download your SA302 – this gives a potential lender a good idea of your finances. If you have other formal accounts, they’ll want to see them too.
Bank statements. These will show the pattern of your income and outgoings – including any income you have other than your self-employed earnings, which might help your case. Conversely, they’ll also show other payments you have to make regularly.
Lenders will want to know how you plan to use the money you want to borrow. You need to be honest about that – be clear if it’s for personal or business use.
Don’t borrow money to get a deposit together for a property – that’s likely to affect a mortgage lender’s decision. And while it can make sense to take out a loan to bring all your debts together, remember debt consolidation doesn’t reduce the amount you owe and might cost more in the long run.
You should be able to get the same rates as someone who works for an employer if your credit rating is good, you meet the lender’s criteria and have the right paperwork. If your credit rating’s not great or there are issues around the criteria or the evidence you provide, it might cost you more. As a rule of thumb, it’s cheaper to borrow over a shorter period.
Whether you’re self-employed or work for an employer, your credit rating is key. If you have bad credit, you’ll probably find it harder to get a loan. Fewer lenders will be prepared to give you a loan and you’re likely to miss out on the best rates. Lenders might not want to lend you the full amount you were hoping for. But that doesn’t mean you don’t have options.
With Experian, you can compare self-employed loans from a variety of companies. You can check your eligibility rating, so you’ll understand your chances of approval before applying.
Just remember we're a credit broker and not a lender so we don't provide credit, but we can help you find and compare different offers all in one place.
We're a credit broker not a lender†