What You Need to Know about Loans for Self-Employed People

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Loans for self-employed people have always been administered on a different plane and according to different criteria. This is necessary due to the nature of self-employment. Income is not always steady from week to week, and verifying income is not as straightforward as presenting three months?? worth of pay slips. In light of that, there are some important things to know about loans for self-employed people if you are thinking of applying for one.

The first thing to note is that stricter borrowing requirements were put in place several years ago as a result of the financial crisis. Banks are required to go to greater lengths to verify income, and they theoretically have more latitude to reject loans they deem too risky. Those who suffer most are the self-employed.

As an example, the Telegraph website recently reported on a self-employed businessman whose two companies enjoy annual turnover in excess of £250,000. The poor fellow saved 15% for a down payment on a home only to discover he could not get a mortgage with a decent interest rate. The banks were asking for three years of financial records despite only needing three month's payslips from his fiancée.

Keep Meticulous Business Records

In light of the difficulty associated with loans for self-employed people, it behoves those who may find themselves in this position in the future to keep meticulous business records that will satisfy mainstream banks. Small business owners who do not know how to do this effectively should speak with a CPA or solicitor for further guidance. Records will be the key to proving income and loan eligibility.

Those already in the position now can do little to satisfy banks that have already shown an unwillingness to lend. One option, as uncomfortable as it might be, is to go to work for someone else long enough to get a mortgage before returning to self-employment.

Higher Interest Rates for the Self-Employed

Another thing to understand is that even when self-employed individuals can get the loans they need, they often face interest rates that are above average. Sometimes those rates can be several percentage points higher, other times they are just slightly higher.

That means shopping around is that much more important for the self-employed. Shopping allows the consumer to compare deals and, with a willingness to negotiate, pit one lender against another to see who will offer the best rates and terms. At the very least, shopping around helps the consumer avoid the most expensive loans on the market.

Secured Loans for the Self-Employed

The other thing you need to know is that most of the trouble self-employed people have with borrowing is related to unsecured loans and first-time mortgages. Borrowers who already own property and have substantial equity built up have an easier time obtaining secured loans.

Why the difference? Because secured loads are supported by equity. A self-employed individual who has owned a business for several years and managed to build up substantial equity has proven to be a stable risk. And given that equity in the borrower's property acts as collateral for the loan, banks are willing to be a bit more flexible with income verification. That is not to say self-employed people are guaranteed a secured loan; just that secured loans are easier to get than first-time mortgages and unsecured credit instruments.

Unfortunately, loans for self-employed people are a bit harder to come by. But anyone with the entrepreneurial skill to build a successful business can eventually find a way to get a loan with enough perseverance, hard work, and creativity.

Sources:

Telegraph ?? http://www.telegraph.co.uk/business/2016/05/03/british-entrepreneurs-locked-out-of-home-ownership-after-rules-t/

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