How personal loans work for the self-employed – Forbes Advisor INDIA
Personal loans have always been a way for people to withdraw money to pay for personal needs such as groceries and utility bills, or simply a way to get the next paycheck. Personal loans are easy to get because they don’t ask for much. You need proof of employment, a few months of payslips and proof of address, and you are ready to receive the amount you signed up for.
However, when you are independent, the requirements are slightly different. For example, you will need to prove that you own 25% of the business, that you are a freelance writer or entrepreneur, and that your salary comes from interest or dividends. Additional requirements will be discussed in this article.
People can take out a personal loan from any registered financial entity, such as a credit union or bank, as long as the financial entity is authorized and certified to lend money. Unfortunately, many loan sharks are not registered, and these creditors usually scam people by charging hefty interest, which people should be wary of.
What are personal loans for the self-employed?
A personal loan for a self-employed person can take several forms. You can also take out a small business loan to cover business expenses, which are still considered personal loans. Here are some types of personal loans for the self-employed to get you started.
Co-signed business loans for the self-employed
A co-signed loan means that you will ask a co-signer to add their name and signature to your loan to guarantee the bank that they will repay the loan in case you cannot. Of course, they won’t have access to your loan fund, but they can help you build up the credit you need while getting the loan.
Credit cards are good if you need to borrow a small amount and have a good credit rating. You can borrow small amounts up to a specific limit, and you can pay off the balance each month so you don’t have to pay interest.
Payday loans for the self-employed
Payday loans can be risky and put you in more debt. However, if you are in need of cash, there are non-profit organizations that can provide you with loans or cash assistance, especially if you are in dire financial straits. You can also ask a credit union for an alternative, especially if your credit rating is low.
Business credit cards
Business credit cards allow you to have a small amount immediately. Plus, you can build your business credit so you can apply for larger loans. You will also be able to keep a record of your finances. You will need to provide your business details, such as your legal structure, estimated monthly expenses, and employer identification number.
A business line of credit allows you to borrow money when needed, primarily to cover a business expense. However, you must have years of business experience to be eligible.
Who Can Get Personal Loans For The Self Employed?
Anyone who is self-employed, whether they own a small business or work as a self-employed person, can get a personal loan for any reason.
Reasons to get a personal loan for the self-employed
Here are some reasons why the self-employed take out a personal loan.
- Paying Off Other Debt – Debt consolidation is one of the reasons freelancers take out personal loans. This allows them to consolidate all of their high interest debts into one payment with a significantly lower interest rate.
- An Alternative to Payday Loan – Compared to payday loans, personal loans have longer repayment options and lower interest rates.
- Moving Expenses – If you are a self-employed person planning to move to another home, a personal loan can cover the expenses.
- Emergency Expenses – Emergency expenses can take the form of hospital bills that are not covered by your insurance or the death of a family member. A personal loan can cover these expenses.
- Appliance Purchases – If you own a small business and need to purchase equipment, you can take out a personal loan to finance your appliance purchases.
How to get a personal loan if you are independent?
Here are some steps that a self-employed worker can take to take out a personal loan.
- Check to see if you have a good credit rating. A good credit rating helps you qualify for a personal loan.
- Gather all the necessary documents and information. You must submit a bank statement, your income tax returns, your latest Schedule C, Form 1099-misc, our Schedule SE, and profit and loss statements.
- Canvas for personal loan companies. Check which ones offer the lowest interest rate and the longest repayment terms so that you don’t have to be pressed for time to pay off your loan.
- Apply online or in person. Depending on the lending company you choose, you can either complete an online application form or visit their office. You may also need to call them during your application.
- Wait for their approval. It may take some time to review your documents, so you need to be patient.
- Wait for the money to be credited to your account. It can take as fast as a few seconds or during the day. If you get the approval on the weekend, you may have to wait until the next business day to receive your money.
Questions to ask yourself before taking out a personal loan
1. Can I get a personal loan if I am self-employed?
Yes. You will need to show proof of income and possibly a work certificate from your current client.
2. Can I get a personal loan if I have a small income?
Yes. However, your loan company will put you under scrutiny, which means you may be waiting longer to get your loan approved.
3. How long do I have to repay it?
The loan repayment term depends on your agreement with the lending company and the amount you borrowed. Some financial companies require you to repay the loan within 30 days if you borrowed as little as $ 500. Some personal loans can be repaid in 12 months.
4. How much interest do I have to pay?
The interest rate depends on the amount of principal and the repayment term of your loan. Some interest rates can be as low as $ 5, but most can go up to 20% of the principal.
5. Will the lending company ask me what I’m going to use the money for?
Credit companies rarely ask the borrower why they need a personal loan. Some might ask you why you will use it, but whatever the reason, that won’t stop them from lending you money. As long as your supporting documents and documents are in order, you will be authorized to take out a personal loan.
6. What are the consequences of a personal loan?
If you can’t pay on time, you could be in trouble with your loan company. Failure to pay your loan may cause the loan company to review your business or profession, and they may ask you to pay a fine on top of your loan balance.
7. Where should I take out a personal loan?
Before taking out a personal loan, you must approach several financing companies. Compare interest rates and APR and see if they are licensed and registered with a national credit union. If they charge cheap interest rates and are fully qualified to lend you money, they are legitimate.
8. How long do I have to work or own a business before I get a personal loan?
For the self-employed, you need to work for at least six months with clients that the loan company can contact. For business owners, you need to be in business for a year.
Taking out a personal loan if you are self-employed is a serious financial commitment. First of all, you will have to religiously pay the fixed amount each month on time so that you do not get fined by your loan company. Before that, you should have a good reason for taking out a personal loan as the interest charges are sometimes high, and you might have a hard time saving money on your monthly income to pay off the loan.
Keep in mind that your credit score could be affected if you cannot repay the loan, and this could affect your chances of getting a loan in the future. Therefore, to take out a personal loan, you must be a good payer in order to maintain a credible credit rating.
As a self-employed person, you need to be careful not to repay your personal loan on time as a breach could negatively affect your business or profession.