Getting a Loan If You Are Self-Employed

When you are applying for a loan, it can be a personal loan, mortgage loan, car finance, any type of loan, there are two (2) main components that are viewed by a lender in order to make a determination as to grant the loan or not.

These two factors are:

*  Credit history and credit score

*  Affordability

A lender will check our credit report and get our credit score, which is a major factor in being approved for some loans.  Not all loans rely on credit scoring, some loan are specifically for borrowers with bad credit, so credit scoring is taken into account, but not as important.

Affordability of a loan is another major player in helping a lender make a decision on granting a loan or not.

If you cannot afford to repay the loan, chances are high you will not be approved for the loan.

When applying for a loan, it is the lender’s responsibility and obligation to inquire into these two things, although as mentioned, there are loans that do not rely on credit scoring, but they still rely on affordability.

As borrowers we are not expected or responsible to have a copy of our credit histories, or our credit scores.  Although if you are going to be applying for a loan, it is always in your best interest to review your credit report for any errors or omissions, and also to know your credit score.

You can correct any errors or omissions, and this may increase your credit score, which increases your chances of the loan being approved.

Increasing your credit score also can help in getting a lower interest rate on the loan, which can save you money in the long run.

Showing Affordability

While a lender can obtain a copy of your credit history and credit score, when it comes to showing affordability, a lender cannot access your bank statements, (for now) or view your wages and spending habits.

This requires the lender to do an income and expense form, to aid in determining affordability.

This form can be as informal as a questions and answer over the phone, or more formal where a form is sent to you to complete in your own time and return.

At anytime, a lender could ask for documentation of what figures you have used on the I&E form.

As a PAYE employee, showing/documenting your wages is simple, you can show wage statements, or bank statements documenting money being paid in each month.

If you are self-employed, this can be more difficult.

You are not going to have wage slips as you are not an employee, however, some people who are self-employed have incorporated the business to an extent and pay themselves a wage as a PAYE employee.

This can be rare, so as a person who is self-employed, how can you show affordability in getting a loan?

Time and Money

They say there are two things that can make anything happen, time and money. And the same can be said here about showing affordability for a loan as someone who is self-employed.

For some new entrepreneurs, it may take a few years before their new business makes any profits or money.

So in this example, it may take a few years to be able to show affordability for a loan.

Bank statements, invoices, contracts, and receivables are all a part of showing your self-employed income, and affordability.

Having an accountant is also a huge help.

Your self-employed tax returns also may be required, to be on the safe side, just imagine they will be required.

So what is the “glass ceiling” or magic number of years to be self-employed in order to get a loan??? Usually three (3) years.

This is not to say you cannot get a loan before three years, but be prepared to show affordability, ad bank statements, and any long-term contracts you have, profit and loss statements, business models, anything to show, you can afford a loan.

Having a good credit history helps as well as a good credit score.

A rundown of what documents you may be required to show are:

* Tax returns for two (2) if not three (3) years

* Three (3) year address history

* Bank statements

* Proof of any rental income, tenancy agreements, etc, if you are a landlord

* Information regarding your business, are you a sole trader, partnership or LLP

Don’t think these requirements or documents are etched in stone. Some lenders may require additional information, and some borrowers with a good credit score, may only need to provide less documentation or information.

However, most loans come down to two factors….credit….and affordability.

You need to be able to show both.

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