Quick Tips on How Self-Employed Individuals Get Personal Loans?

Understanding Personal Loans for the Self-Employed

A personal loan is taken by an individual without any security for several reasons that range from home renovation, debt, events like marriage, medical expenses and so on. Their loan application process can be quite different from the salaried class due to the variation in income.

Points to Consider

• Income Variability: Since there is an absence of a continuous monthly income from salaried people, there may be some gaps in their earnings. This fluctuation often makes the lenders precarious about giving out a loan.
• Documentation Requirements: There might be an extensive requirement to produce several documents from the lender’s side in order to assess the flow of earnings of the applicant and whether they possess repayment capacity.

Eligibility Criteria for Self-Employed Individuals

There is no set criteria for the loan process, this can differ from one lender to the other. However, here are some common requirements for self-employed applicants. Being mindful of these requirements can help in their loan application.

• Proof of Stable Income: Typically, the applicants are required to produce a copy of Income Tax Returns for the past two to three years. This reflects the financial stability and income capacity of the applicant.
• Bank Statements: The applicants are also required to produce their bank statements from the last six months to one year. This helps in assessing the individual’s cash flow and repayment capacity.
• Credit Score: It is always recommended to keep your credit score more than 750 for a swift approval of your loan application. This score can be checked online on various financial websites by entering your details.
• The Length of Business: If the applicant’s business has been running for the past two to three years, the financial stability is ascertained resulting in a quick processing of your loan.

Challenges Faced by Self-Employed Individuals in Getting Personal Loans

Since personal loans are unsecured in nature, there might be some challenges in securing them, especially for self-employed people.

• Higher Interest Rates: The instability in income can be perceived as a potential threat of non-repayment of the loan. Therefore, lenders often charge a higher rate of interest from self-employed individuals as compared to people with regular salaried jobs.
• Stringent Eligibility Criteria: The requirement to produce an exhaustive number of documents related to your financial history can often turn quite stringent for self-employed people to qualify for the loan.
• Limited Lender Options: For the reasons stated above, the number of financial institutions offering Personal loans to self-employed people is also limited.

Tips to Improve Loan Approval Chances for the Self-Employed

Here are some effective tips for all those looking for personal loans who do not come from salaried strata.

• Maintain a High Credit Score: If you are a credit card holder, ensure your CIBIL score or credit score should be high. This can be done if you pay your credit card bills well on time. It is advised you check your credit card bill monthly and clear all the outstanding amounts or pay a minimum amount to save your credit score from getting low.

 

==> Step by step guide to improve your Credit Score

  

• Prepare Comprehensive Documentation: It always helps to have a robust financial portfolio which should include the records of your Income Tax Returns (ITRs), Bank Account statements, Profit and Loss records, and all other related records. This will help in forming your goodwill and trust with the lending body and increase your chances of loan approval.
• Show Consistent Cash Flow: It always helps if your bank account has a good cash flow at least every month so that your financial stability can be highlighted.
• Consider a Co-applicant: If your financial portfolio is not robust enough, you can consider co-applying with someone who has a good credit history and a stable income. The co-applicant profile can mitigate any perceived risk thereby increasing your chance of loan application.
• Opt for Secured Loans: If you are not able to apply for an unsecured loan, try applying with a collateral or a secured loan. Whenever there is a guarantee in the form of any asset comes into the picture, the chances of approval of your loan are automatically increased.
• Limit Loan Amounts: If the loan amount is big, and you don’t have a stable income, you might not be able to secure it right away. It is recommended you ask for a smaller loan amount and repay it on time to earn the trust of the lender. This can help you get a larger loan.
• Explore Alternative Lenders: Instead of going to traditional lenders like banks, you can also try non-traditional fintech companies or lending platforms for such loans. These firms are often flexible with eligibility criteria and offer various loans suitable for people without a fixed salary.

Benefits of Personal Loans for Self-Employed Individuals

It seems quite a task to get a personal loan for those who are self-employed, however, there is a bright side to this. Let’s take a look at all the benefits of personal loans.

• Flexible Use of Funds: Once sanctioned, the amount is up to the disposal of the individual. These loans can be utilized in many ways according to one’s requirements.
• No Collateral Required: Since these loans are unsecured in nature, there is no need to produce collateral so nothing is at stake in case of non-repayment. Nevertheless, it is highly recommended to pay your EMIs on time to avoid any unpleasant experience.
• Fixed Interest Rates and EMI: Since there is a repayment amount decided by the lender which is to be paid every month, there are no EMI surprises if there is good financial planning done on time.
• Quick Disbursal: Upon approval, the loan amount is disbursed quickly which gives the individual a chance to receive the full amount instantaneously.

 

Yes, self-employed individuals can also get personal loans, albeit with some extra documentation and screening by the lender. Make sure to follow the eligibility criteria, gathering all the proofs and papers ready to be submitted to the lender so that your application can be improved.