Whether you’re a coffee shop owner, an independent contractor, a freelancer, or even a gig worker—think DoorDash delivery driver, pet sitter through Rover, and so on—you are self-employed. You aren’t subject to a Wage and Tax Statement, a W-2.
You may wonder how to get a personal loan if you’re self-employed. The process is slightly different than if you were an employee, but it’s still fairly straightforward. Here’s what you need to know.
Can you get a personal loan if you’re self-employed?
Yes, it’s certainly possible to get a personal loan while self-employed. Having a W-2 is far from the only thing lenders look for in a borrower. If you’re a business owner with stable income, you may well qualify for a personal loan. The most important quality of an ideal customer is one that can afford to pay back the loan—and who has a proven track record of trustworthiness in managing credit.
However, because you’re the one that signs your own paycheck so to speak, you’ll need to demonstrate that you have sufficient and reliable income. Be prepared to prove your earnings with documents such as:
- Tax returns
- Personal and business bank statements
- 1099-NEC forms
You’ll also need to provide other standard personal details such as your Social Security number and proof of address.
Is it harder to get a loan when you’re self-employed?
The reason it may feel harder to get a loan when you’re self-employed mainly comes from the variable nature of your income vs., say, a salaried job with a guaranteed annual income. Your earnings may not be the only thing that fluctuates; your expenses may change, as well. Both of these things can change your net income.
To make matters trickier, business deductions can also misrepresent your debt-to-income ratio, as they lower your taxable income and make it look like you earn less than you actually do.
Lenders often rely on a two-year track record, requiring at least two years of self-employment history for that income to qualify. In other words, they want proof that your business and earnings are stable. You may be held strictly to this if you’ve transitioned to self-employment but remained in your same field—or if you have excellent credit and can show proof of considerable cash reserves.
These nuances combined means you may be unlikely to get an automated “instant approval.” Prepare for the possibility your application will head to a manual review.
How to get approved for a loan when you’re self-employed
When it comes to obtaining a personal loan, there are a few helpful tips to keep in mind. Do these things to give yourself the best chance at approval.
Improve your credit score
To have the widest selection of loan options and hopefully receive offers with comparatively low interest rates, you’d ideally apply for a personal loan when your credit score is at least “good” (generally meaning a FICO of 670 or above). If you’re not there yet, focus on the following:
- Always pay your current accounts on time.
- Lower your credit utilization (experts recommend keeping the balances of your revolving credit below 30% of your total available credit).
- Maintain current loans and credit cards—and avoid the opening of several new credit cards—to preserve a lengthy average age of accounts.
It’s worth noting that If you’re applying for a business loan as your company entity and don’t want to use a personal guarantee, the lender will look at your business financials instead of your personal profile. Certain business structures, such as LLCs and corporations, can have their own credit score, so building business credit (through timely vendor payments, business credit accounts, etc.) is a big deal.
Lower your debt-to-income ratio
Debt-to-income ratio (DTI) is the amount of your monthly income that goes toward paying your debts. For example, you may have $7,000 in monthly income but pay $1,400 per month in auto loans and credit card balances. In this case, your DTI would be 20%.
Lenders pay close attention to your debt-to-income ratio, as it’s an indicator of whether you can afford to take on another monthly loan payment. It can also help them discern your financial responsibility. Many lenders prefer a DTI of 40% or less.
Lower your DTI as much as possible before you open a loan. For example, if you’ve currently got another installment loan, try to pay that off to eliminate a monthly payment from factoring into your DTI.
Apply with a cosigner
Applying for a loan with a cosigner can dramatically increase your odds of approval. That’s because lenders will consider the credit profiles and financial situations of both you and your cosigner. If you as a self-employed individual have varying monthly income figures but your cosigner has a stable and predictable income, the bank may be more willing to work with you.
It’s worth noting that your cosigner is on the hook for paying off your loan if you don’t. Failure to do so will negatively affect the credit of both of you.
Consider a secured loan
Secured loans are typically easier to be approved for because they give the financial institution a sort of guarantee that they won’t lose all their money if you default on your loan. Secured loans require collateral, making you a less risky borrower.
For example, you might put up your car as collateral on a loan. If you don’t repay what you owe, the bank can take possession of your car and use it to recoup its losses.
In other words, secured loans are more risky for borrowers than unsecured loans which require no type of security deposit.
Alternatives to personal loans for self-employed individuals
A personal loan isn’t the only option at your disposal if you’re self-employed. In fact, you may have even more ways to fund a purchase than someone without their own business. For example:
- Small business loans: Similar to a personal loan, a small business loan is a lump sum of cash meant for business-specific expenses. There are often stricter requirements (think collateral, business entity documentation, etc.), but small business loans are typically available in larger amounts than personal loans.
- Low-APR credit cards: Because of their often eye-watering interest rates, credit cards aren’t the best way to make a large purchase you can’t pay off within a few months. But some credit cards offer low intro APRs for a limited time—often a year or nearly two—which can be a cheap way to finance your purchase. Some small business credit cards also offer introductory interest-free windows upon account opening.
- Home equity loan: A home equity loan behaves similarly to a personal loan in that it gives you cash upfront and sets you up on monthly installments until you’ve repaid the money (plus interest). The difference is that this loan is secured by your home. Depending on the amount of equity you’ve built in your home, you may be able to borrow an amount much larger than what you’d get from a standard personal loan—hundreds of thousands of dollars higher, even.
Of course, you may also be able to borrow money from friends or family and repay them without the hassle of formal credit checks, interest, and documentation requirements. Make sure to have a frank discussion and agree on a clear repayment plan before doing this.
The takeaway
Getting a personal loan can be a bit more complicated for those who are self-employed than for those who have a W-2 with perhaps more predictable income. That doesn’t mean you can’t be approved for a personal loan; you’ll just need to be prepared to show tax returns, bank statements, etc. to prove your income is reliable.
To give yourself the best chance at approval, you’ll want to lower your debt-to-income ratio, maintain a good credit score (670 or above), and maybe even opt for a secured loan. If you’re having trouble being approved, you may also consider a cosigner.
Frequently asked questions
Are personal loan rates higher for self-employed borrowers?
Personal loan rates are not automatically higher for those who are self-employed. That said, rates are typically assigned based on credit risk—so if the lender thinks your business income makes you a risky borrower, you may be subject to a more severe APR.
Which lenders offer personal loans to self-employed individuals?
Most lenders make personal loans available to both employees and business owners. As long as the financial institution is confident you can repay the loan, you should be eligible.
How long does it take to get approved for a personal loan when self-employed?
While many lenders promote same-day loan approval, business owners may find the process to be longer. Lenders may want to do manual checks of details like bank statements and 1099-NEC forms.
Does having a higher credit score help self-employed borrowers get better loan terms?
Yes, having a high credit score helps those who are self-employed to get better loan terms. Your credit score is far from the only factor lenders examine, but a good credit score is critical to qualifying for favorable repayment lengths and interest rates.
What is the debt-to-income ratio requirement for self-employed personal loan applicants?
Many lenders prefer that your debt-to-income ratio is no higher than 40% when approving you for a personal loan. This isn’t a hard rule; those with a stellar credit profile may be approved with a higher DTI.
