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Applying for a personal loan when you’re self-employed

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You may be considering a personal loan if you’re looking to make a big-ticket purchase, consolidate high-interest debt or cover a financial emergency. But if you’re self-employed, it can be challenging to get approved as the lender will likely request documents, like recent pay stubs or W-2s, to prove your income.

Even if you’re unable to provide this information, you’re not completely out of luck. Some lenders will consider bank statements or tax returns instead. You can also explore small business loans if the funds will be used to cover business-related expenses.

How to qualify for a personal loan when you’re self-employed

Before you apply for a personal loan, you should know what types of income documentation the lender may consider. It’s equally important to check your credit score to ensure it’s up to par.

Prepare to provide income documentation

One of the first and most important steps in applying for personal loans is to produce documentation to verify stable, consistent income. This is a pretty straightforward process for someone who works for an employer, as they would usually just need to provide copies of recent pay stubs. Some lenders can even verify income electronically through an employer’s payroll system.

However, would-be borrowers who aren’t on an employer’s payroll will need to produce other documentation to prove their income According to Mary Monroy, credit counselor with ClearPoint Credit Counseling Solutions, “The lender will likely require the most recent two years’ tax returns, a profit and loss statement and bank account statements to verify the income is seasoned. If it isn’t, then sometimes copies of deposited checks are required.”

Chris Dervan, senior vice president and product manager at PNC Bank, said that income verification is a standard requirement for all loan applications, regardless of income sources. “We require income information and documentation for all applicants, so in that respect, there’s no difference for self-employed borrowers. The variation would be in the type of documentation involved with those who don’t have a pay stub,” Dervan said.

Check your credit before you apply

Lenders want to know that you can afford to make timely loan payments. In turn, many have minimum credit score thresholds for prospective borrowers. Other lenders are more lenient in credit requirements but will offer a higher interest rate or cap the loan at a lower amount.

Although it’s not a requirement, it can be much easier for self-employed applicants to get approved for a loan if they have a cosigner. That shows the lender that the applicant has financial backup in case their business goes under, or they are unable to pay back their loan in full. Having a cosigner can also help you negotiate a lower interest rate or higher loan amount based on your needs.

An alternative option: Business loans

Whether you’re having trouble qualifying for a personal loan or would prefer to explore other options, a business loan could meet your funding needs.  In fact, it might actually be a better option if you’re considering a personal loan for business use, and it’s possible to get approved for a higher amount than you would with a personal loan. Keep in mind that a business loan can only be used to cover business-related expenses, which makes it less flexible than a personal loan.

There’s another downside to consider: when you apply for a business loan, you’ll likely have to complete a lengthier application than for a personal loan. Plus, the lender could request business financial statements, proof of income, profit and loss statements, projected financial statements, tax returns and any loan application history, if applicable.

Similar to a personal loan, you’ll also need good or excellent credit to qualify for funding. If your credit score is low, you may still be approved, but with less favorable loan terms. And if your business hasn’t been established for an extended period, you’ll generally have to provide a personal guarantee for the loan. This means you’ll be personally liable for the outstanding balance if your company falls behind on payments.

The bottom line

Despite the hurdles associated with personal and business loans as a self-employed applicant, it’s possible to get approved, even without a W2 pay stub. According to Dervan, potential applicants should know that lenders encourage those with self-employment or freelance income to apply for loans and explore the various loan options that may be available to them. “We welcome self-employed applicants and will do everything we can to work with them to help them obtain a loan,” he said.

Before applying for a loan, shop around to find lenders that specialize in self-employment loans. These financial institutions are better equipped to guide self-employed individuals through the loan process and often provide loans with favorable terms.

It also helps to have the necessary paperwork organized and ready to go when completing the application. The more financial documents you can provide to substantiate your income, the better. Starting off with a good credit score is also a huge help, as is applying with a cosigner if your credit score is on the lower end.

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