How to get a personal loan for self-employed borrowers

Understanding lender requirements

Lenders require self-employed borrowers to prove their income with documents like tax returns, bank statements and business records before approving a loan.

When you want to get a personal loan but are self-employed on a full-time basis, there are a few more hoops to jump through than there would be with a regular W-2 job. You can still qualify, but you’ll need to submit extra documentation to verify your income.

You’ll still need to have a decent credit score and low debt-to-income ratio to be approved for a personal loan, but self-employment income is a bit trickier to quantify. In most cases, you’ll apply with your personal credit score (not business credit score), and existing debts — both business and personal — will be considered.

In general, if you’re self-employed, filling out a personal loan application requires submitting the following information:

• Personal information: You’ll need to submit your name, address, Social Security number, birth date and possibly more.
• Business information: If you're self-employed through your own business, you may need to provide details about your company and the industry you work in.
• Financial information: Most lenders require you to submit information about your annual income, sources of income, mortgage or rent payments, and debt balances and payments.
• Tax return details: Because you don’t have W-2s or pay stubs, you’ll need to prove your income using your tax returns. Most lenders ask for two years’ worth of records.
• Bank statements: Lenders review your bank statements to assess your current financial health, verify reported income deposits and check for consistent cash flow.

Submitting all of this information helps give lenders a more complete picture of your finances and proves your self-employment income.

You may also need to provide a profit and loss statement from your business (if you have one). The lender may also ask you for additional information about how your company operates, including margins and expenses.

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Best loan options for self-employed individuals

Choosing the best loan option depends on what you need the loan for. If you want to add a pool to your backyard or are looking to consolidate personal credit card debts, a regular personal loan would make the most sense. But if you need capital for your business to add more inventory or to pay vendors, you may need to get a business loan.

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Personal loans vs. business loans

Personal loans are best for consolidating personal debts or for funding personal projects and expenses. Business loans are designed to help with business expenses or debts, which can expand your business or help it grow through strategic funding.

Here’s how the two compare:

Personal loans

• You can use a personal loan for nearly any purpose.
• Approval is based on your personal credit score, earnings and debt-to-income ratio.
• Personal loans are unsecured, meaning they don’t require collateral, and are usually approved based on your credit and personal finances.
• Loan amounts usually range from $1,000 to $50,000, and there are very few available over $100,000.
• Once approved, you may receive funds on the same day or by the next business day.
• Personal loans don’t help you build business credit and don’t require business financials.

Business loans

• Business loans must be used for business expenses like equipment, inventory or working capital.
• Approval is based on business credit (and often personal credit), income history and tax returns.
• Loan amounts are much higher, typically ranging from $5,000 to over $500,000, and repayment terms are often longer.
• Many larger loans are secured by business assets or future revenue.
• SBA loans offer favorable terms but involve a more complex approval process.
• These loans may offer tax benefits, but qualifying is more difficult.

Steps to apply for a personal loan

If you’re ready to get a personal loan and already know the amount you want to borrow, here are the steps to take as a self-employed individual:

1. Assess your finances

Start by checking your credit score; you can get a free credit report online. A score of 650 or higher helps, but it’s still possible to get a loan with bad credit.

You’ll also need to gather documents like tax returns, bank statements and a profit-and-loss statement, if you have one.

2. Compare lenders

You’ll want to look at online lenders along with local banks and credit unions. Focus on interest rates, fees and repayment terms. Some lenders, especially those online, offer preapproval, which lets you see potential offers without your credit score taking a hit.

3. Complete your personal loan application

Most applications are online and typically ask for personal, financial and business info, including tax returns, bank statements and other details. You’ll need to submit your documentation too. Some lenders approve or reject applications instantly, while others take a few days to a week to review everything.

4. Receive funds and set up payments

Once approved, the money usually hits your bank account within a day or two. It’s a good idea to set up autopay; some lenders even offer a small discount if you do. If not, be sure to set up some reminders and alerts to stay on top of your monthly payments.

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Overcoming common challenges

While it’s true that self-employed borrowers may have a tougher time getting approved for a personal loan, there are ways to overcome some of the common challenges when borrowing as a freelancer or small business owner. Here are some common obstacles and how to get around them:

• Inconsistent income: When you’re self-employed, you usually don’t get a consistent paycheck. This means your income can go up and down like a roller coaster, and lenders don’t like unpredictability. You can overcome this by providing multiple years of tax returns to show your overall income, proving your ability to repay the loan.
• Hard to prove income: When you’re self-employed, you can’t just give lenders a W-2 or pay stubs to prove your earnings. You’ll need to prove your income by providing past tax returns and bank statements, which will show deposits into your account.
• Complicated taxes: When you’re self-employed, your tax return may be harder for lenders to review. You’ll want to work with a company that understands business income, how Schedule C works and your overall tax return to get approval.
• Higher debt load: As a self-employed business owner, you may have a large credit card balance or other business debt already, which increases your overall debt-to-income ratio. You’ll want to pay down your debts to improve your chances of qualifying.
• Credit score requirements: Getting the best rates on a personal loan requires a good credit score. When you’re self-employed, borrowing on a credit card or other loan can impact your personal score, even if the debt is used for business purposes. It’s important to manage your debt obligations — both business and personal — with on-time payments to help keep your credit score high enough to be approved.

Tips for maintaining financial health

It’s important to keep your overall financial health in good shape to improve your chances of approval, especially if you’re self-employed. Here are a few things you can do to keep yourself in a solid financial position, which makes lenders happy:

Maintain your credit score

Making on-time payments for all of your bills and maintaining your oldest credit accounts can improve your credit score. Also, getting your annual free credit report to look for discrepancies can help you clean up your credit and increase your chances of loan approval.

Pay down your debts

A high debt-to-income ratio can impact your odds of getting a personal loan. Keeping your personal and business debts manageable will help you maintain financial stability and allow you to borrow more.

Document everything

It’s always a good idea to keep good books, but it’s especially true that you’ll need to keep thorough documentation if you’re self-employed or running your own business. Using online bookkeeping software to track your income and expenses and running regular reports can help you prove your income, which is required for loan approval.

Keep an emergency fund

When you’re self-employed, it’s always a good idea to prioritize savings and keep a healthy emergency fund. In addition to weathering the ups and downs of self-employment, it’s good for loan underwriters to see cash in your account during the application process.

Is a personal loan worth it when you’re self-employed?

Yes, a personal loan is worth it if you have strong credit and can prove that your income is steady through tax returns and bank statements. Even without a traditional job, a personal loan can be a good way to consolidate debt or cover large expenses — as long as you can show lenders that your finances are stable.

However, if your income is too inconsistent or you can’t meet the lender’s documentation requirements, it might not be worth applying. Instead, you may want to focus on paying down existing debt, improving your credit score or building a stronger financial record to increase your chances of approval later.