Nov 04, 2024
Applying for a loan when you’re self-employed can be complicated. You’ll need to prove your income to lenders without the benefit of pay stubs or a letter from an employer. But getting approved for a loan is still possible if you know what to do.
There are an estimated 15 million people in the U.S. who are self-employed either full-time or part-time.1 If you are currently among this group or planning to strike out on your own, keep reading to learn more about what your loan options are. It’s important to be prepared before you apply and to know the ins and outs of what lenders might require.
A self-employed person is someone who earns income without being an employee of another individual or company. You may be considered self-employed according to the IRS if you are an owner of a business, a partner in a business, an independent contractor, or in business for yourself.2 Here are four common types of self-employment.
Gig workers, such as those in ride-hailing, maintenance, or food delivery, often find jobs through websites or apps. They typically perform tasks and have little expectation of long-term work. This type of work may be informal or be structured as an on-demand service.
Freelancers are non-permanent workers doing jobs such as programming, writing, or graphic design. They may work on a variety of projects for different clients. They choose their jobs, set their own pay, and handle taxes themselves. They’re typically paid by the hour or the project.
Independent contractors function as temporary employees, though they may work for multiple clients at the same time. They might find clients through an agency that sets their payment rates. These workers might include specialists in construction, law, or medicine. Like freelancers, independent contractors are typically paid by the hour or project.
Small business owners are self-employed workers who own a business entity. This could be as a sole proprietorship, a limited liability corporation (LLC), a partnership, or a corporation.
Lenders prefer lower-risk applicants who can prove consistent sources of income. This may show the lender a higher ability to repay loans on time. Without a W-2 form or pay stub from an employer that verifies your income, you might face hurdles demonstrating your ability to repay the loan. You might face several challenges regarding your income.
When applying for a loan, self-employed workers may need to provide extra paperwork to prove their income. Instead of submitting a single W-2 form as proof of income, you might be asked to share tax forms. These may include 1099s if you’re a freelancer, gig worker, or independent contractor;3 1120s for corporations;4 or 1065s for partnerships.5
Other documents might include your tax returns and bank account statements. The lender will want to see that you’re depositing enough money to cover the monthly loan payments. You may also be asked for other financial information, such as social security benefits statements or court-ordered agreements.
Income can ebb and flow for many self-employed workers. You may need to prove you have a consistent income over time and a history of making payments. Freelancers and independent contractors often have many projects with different payment schedules. This can make income appear unpredictable to potential lenders.
As a self-employed worker you may be able to deduct many business expenses. Reporting a lower adjusted gross income and taxable income can work against you when applying for a loan. Lenders might focus on your net income after your deductions rather than your overall revenue. It’s always best to consult with a tax professional.
There are many elements involved in a decision to approve a loan. Each loan type has factors that lenders may apply. Your approval may depend on confirmation of some or all of the following elements.
Your credit history shows how you’ve managed your credit over time. Your credit report includes information such as the number of credit cards you have, the amount of debt you carry, and if you pay your bills on time.
Your credit score is affected by your credit history. It provides lenders with a measure of your creditworthiness, which gauges how likely you are to pay your bills on time.
Revenue is the total amount of money that you collect over a specific amount of time. Income is the amount of money you keep after your expenses are deducted.
Your debt-to-income ratio compares your monthly bill payments to your gross monthly income. It is calculated by dividing your total monthly debt payments—such as rent, credit cards, and car payments—by your monthly income.
Your employment history is a list of companies you’ve worked for, usually including job titles and dates of employment.
Your savings is how much money you’ve set aside for the future. This might include savings accounts, retirement accounts, certificates of deposits, and more.
There are many types of loans that people with any kind of job might seek depending on their financial needs and goals. Each type of loan has its own set of requirements.
Some loans, like mortgages, car loans, or boat loans, can use property or assets as collateral to help guarantee the loan. Other loans are unsecured, meaning they are approved based on the financial history of the borrower.
If you’re self-employed and looking to cover living expenses, new equipment, or other important purchases, you have several possibilities. Below are some loan options you might consider depending on your situation.
Whether you’re a gig worker, freelancer, independent contractor, or small business owner, you might consider using personal credit cards to pay for expenses. Credit cards, however, often have higher interest rates than other types of loans, so they may cost you a lot in interest.
You might also consider using a credit card for a cash advance. This lets you borrow against your available credit limit. With credit card cash advances, though, you may start accruing interest from the date of the transaction. There may also be a service fee.
A personal loan may be the right choice for any self-employed worker. Personal loans offer flexibility for a wide array of uses, such as unexpected expenses and debt consolidation.
Personal loans also offer flexible repayment terms, a fixed interest rate, and one set regular monthly payment.
With a Discover® personal loan, for example, there are flexible repayment terms for all loan amounts—36, 48, 60, 72, and 84 months. Also, there are no fees of any kind as long as you pay on time. At Discover, personal loan amounts range from $2,500 to $40,000.
If you own a home, you might also consider a home equity loan or a home equity line of credit (HELOC). These loans may be helpful if you are looking to borrow a larger amount than a personal loan offers. They often have lower interest rates than credit cards and other types of loans. A portion of the loan may also be tax deductible.
With a home equity loan, you borrow against the value of your house. In other words, your house serves as collateral in case you cannot repay the loan. A home equity loan has a fixed term and gives you the money in one lump sum.
HELOCs are similar to home equity loans. They also use your home as equity. Instead of providing a lump sum payment, however, they let borrowers draw from a line of credit.
If you own a business or have other assets, you may be able to use those as collateral for a secured loan. By securing the loan with a dedicated savings account, a car, boat, or other asset, you might be able to request a larger amount of money and get longer repayment terms. A secured loan might be structured as a lump sum or a line of credit, which allows you to borrow repeatedly up to your credit limit.
If you’re a sole proprietor or own an LLC, a traditional small business loan might be an option. Small business loans can be used for many purposes, such as buying new equipment and real estate purchases. These loans can be obtained from several sources, including banks, credit unions, online lenders, and community nonprofits.
You might also research a loan from the U.S. Small Business Administration (SBA). The SBA has several loan programs that might fit your needs. One loan, called a micro loan, provides up to $50,000 to help small businesses grow. Micro loans cannot be used to buy real estate or pay existing debts.
Before you apply for a loan, it’s important to do some research. Here are some tips on how to proceed.
Take a look at your income and debts, as well as your monthly costs and recent tax returns. A good understanding of your current finances may help you determine the type and size of loan that you need.
Research loan options at financial institutions where you currently have accounts or credit cards. You may already have pre-qualified offers. Banks may give more-favorable terms to current customers if they have a strong banking and credit history together.
Be sure to compare the terms and conditions of any loans you are considering. In this way you can narrow down your options and make an informed choice.
The quality and reputation of lenders may also differ. You will want to search for a lender that is transparent about the terms of its loans and a customer service team to answer all your questions.
Gather your tax and financial statements from the past few years. Confirm what documentation each lender requires for self-employed loan applicants. It can be helpful to create a digital or physical folder to store your loan documents in.
After considering your options, you may decide that a personal loan is the best choice for you. A personal loan can be both flexible and convenient. You can use it for personal expenses, to consolidate debt, or to pay for unexpected costs.
Plus, you’ll have one set regular monthly payment and know when your loan is due to be paid off. At Discover Personal Loans you can design your loan around your financial situation. Pick the amount you need and the repayment term from options offered to fit your budget.
If you have questions about documents you might need or how you might use a personal loan, give us a call at 1-866-248-1255. You can talk with a U.S.-based loan specialist who will explain your options and help you complete your application.
To learn more about our quick and easy online process and to see what you need to apply, visit us here:
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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
