The days of self certification – when anybody could get a loan or mortgage by simply saying that they earned a certain amount of money each year – are long gone. For at time, the financial crisis of 2009 made it almost impossible for the self employed and others without payslips from an employer to get approved for personal loans and other forms of credit.
Before the Great Recession, self-cert loans were rife as hundreds of thousands of people successfully applied for credit simply by verifying their own income.
But the crash changed all that and lenders dramatically tightened lending criteria and the Financial Conduct Authority stepped in to ban self-cert loans and mortgages.
While the situation remains more difficult for the self-employed when it comes to obtaining personal loans, it is by no means impossible. A lender is much more likely to scrutinise your application and your credit record if you are self employed rather than in paid employment and will shy away from anything it perceives to be a red flag.
Different types of self employment
There are many different types of self employment: those who make or produce something that is then retailed, those who provide services to one or more clients, those on fixed term or rolling contracts and those who may fall foul of HMRC’s IR35 rules.
For those on contracts but not actually in a staff position at a company, loans are still available but you are going to find it harder to get accepted than for those on straightforward PAYE. You can increase your chances of a successful personal loan application if you can demonstrate that your contract has been renewed by the same employer while other lenders may have stricter criteria and could ask for you to demonstrate that your contract has been regularly renewed over the past one or two years.
Those at the start of contracts should be prepared for lots of follow-up questions and to be confronted by demands for evidence of payments, agreements with a contracting company and other documentation. If this is your first attempt at contract work and you don’t have much experience within the industry you are working in, then be prepared for a lot of rejections.
The good news is that getting a personal loan should prove to be easier than securing a mortgage for most self-employed people. There are a quite a few options open to borrowers, which should mean that there’s a tailor-made solution to suit your needs.
Securing a Personal Loan When You Are Self-Employed
If you’re self employed and considering applying for a personal loan then it pays to be prepared. Lenders will expect you to have the right documentation ready for them so that they can make a decision quickly.
You are likely to be asked for your P60 showing proof of income over the previous financial year. A lender might also ask you for copies of invoices and, if you are VAT registered, to provide it with copies of your VAT returns to HMRC.
After you have provided proof of income, the process should be relatively straightforward and you can expect to have to pass the criteria that people who are in staff positions have to go through.
Choosing a Loan
While self-employed people usually apply for loans for the same reason as employed workers, what distinguishes them in the eyes of a lender is the fact that their income might rise and fall throughout the year. That means that lenders might insist on charging a higher interest rate if you work for yourself as opposed to somebody in a job.
It pays; therefore, to talk to lenders directly wherever possible to find out what particular terms and conditions you might face before you submit an application. Remember, too, that you can use the pre-eligibility calculators that many lenders and online comparison sites use to give you a good idea of the likelihood of acceptance without having a search registered on your credit record.
Other Forms of Unsecured Loan
These community-based organisations have become extremely popular in recent years, particularly among people seeking small loan amounts where credit union lending can be more affordable and more flexible than going to your high street bank. This is particularly true for the self-employed who may face stricter criteria and higher interest charges with mainstream lending.
Credit unions are required to cap lending interest at 2% per month although you will find that the rates charged are usually lower than this. Also good news for self-employed workers is the flexibility of credit union lending which means that you can often take payment holidays when times are tough and there are no early redemption fees should you suddenly find your income taking off
Social lending; often referred to as peer-to-peer lending is an option for self-employed people who are unable to access funds through other ways, particularly if you need a loan to continue to run or expand your business.
There are a number of websites which act as peer-to-peer loan brokers which are able to offer better rates by matching suitable lenders with borrowers. Loans are offered as fixed sums with set interest rates – an individual applies for a particular loan but cannot vary the amount on that loan.
It’s worth regularly checking individual peer-to-peer sites regularly as loan rates can vary dramatically.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans – a company with many years’ experience in advising clients of their most suitable types of credit.