Finance

Loans for Self Employed With Low Credit Score

December 14, 2019

Are you self-employed and looking to borrow loans with bad credit? Learn more.

When you’re self-employed, things like applying for a personal loan or any type of loan can be more challenging than they are for employees. Banks and other traditional lenders love the certainty of a stable employment contract. When you don’t have that, they make you jump through a lot more hoops.

It can be even harder to find loans for small business owners and self-employed borrowers with bad credit. But let’s not go into the details of how or why you might get rejected; let’s look at how loans for self-employed with bad credit might get approved.

How do you apply?

As a self-employed person, you need extra documentation to prove that you can afford the loan term. Lenders usually ask for some combination of the following:

Two years of tax returns, including Schedule C (business profit/loss statement) and Schedule SE (self-employment tax) forms
Bank statements, if you’re applying for a secured home loan or small business loan
Your credit report
Your debt-to-income ratio, or DTI

If you’re able to provide two or more years of tax returns showing consistent self-employment income, your lender might be less likely to ask for your credit score or DTI. That said, if you’re looking specifically for self-employed loans with bad credit, you might have more trouble. Perhaps you can try other flexible alternatives like no stated income personal loans, which would still require collateral assets as it’s a secured loan. Whereas, with an unsecured loan, it doesn’t require any collateral. Keep in mind that with a secured loan, repayment terms tend to be predatory. If you have debt, be sure to learn how to consolidate debt with bad credit. It will only make things easier for you in the long run.

What Do Lenders Consider to Be Bad Credit?

Lenders usually evaluate your credit history using the FICO credit score system, which collects information about your borrowing history and rates it on a scale of 300 to 850. The higher your score, the less risk you pose to lenders.

Technically, there is no rubric for determining whether a credit score is “good” or “bad.” FICO leaves it to the lender to determine how much risk they’re willing to tolerate in a self-employed borrower. In general, though, this is how it usually breaks down:

720 or higher = Excellent
690-719 = Good
630-689 = Fair
300-629 = Bad

If your score is in the “bad” range, you’re not alone. FICO reports that 20 percent of borrowers have credit scores under 600, and another 10 percent are in the 600 to 650 category. Of course, these percentages might be small comfort as when you’re self-employed, getting loans of any type can be difficult with bad credit.

Loans for the Self-Employed With Bad Credit

Big banks are less likely to take a chance on someone with poor credit, but there are plenty of lenders out there that will. Whether you are looking for loans for independent contractors or just self-employed loans – here are just a few bad credit loan option examples.

Credit Unions

A credit union is a local nonprofit that offers financial services to members. Each one restricts its membership in some way as part of its charter, but some are broad enough that everyone who lives or works in a particular area is welcome to apply for loans, even the self-employed.

Because credit unions exist to serve their members and not to make a profit, their lending requirements tend to be more lenient. They look at your entire financial picture and not just your credit score and bank balance, and that means you have a chance to make a case for yourself.

If your score is low, credit unions will probably still require you to pay a higher interest rate, since they have to make up for the risk. And even getting bad credit could require the union to conduct a hard credit check, which could make your score drop further.

Peer-To-Peer Lenders

Just like Uber changed the way you call a taxi and Airbnb changed the way you book travel, online peer-to-peer lenders are creating a new paradigm in lending. Instead of working through a big bank or loan company, you apply online and match with an individual investor. This could be a good option if you’re self-employed and need loans but have bad credit.

Peer-to-peer lending, also known as P2P, tends to be more affordable than traditional borrowing because you’re not paying a company’s overhead fees. The loan application process tends to be easier and you might find more options for someone with less-than-perfect credit.

As with any loans, however, you’ll pay more in interest if your credit is bad. Combined with the relatively high loan origination fees you’ll probably pay, this can make peer-to-peer lending less affordable.

Payday Loans

A Payday loan is famous for being easy to get if you have a low credit score. They don’t require a credit history or credit score – in fact, they’re often called “no credit check loans.” Instead, you write a check for the borrowed loan amount plus a fee and the lender cashes it when the time comes to repay.

They’re intended to be short-term solutions because they come with a high-interest rate. Lenders communicate these rates as fees, so you don’t always know how much you agree to pay.

For instance, you might borrow $200 with a $40 fee and expect to pay it back within two weeks. But what you’re actually signing on for is an annual percentage rate (APR) higher than 500 percent, and it could keep accumulating. If you can’t afford to pay quickly, you can easily end up owing much more than you borrowed.

Also, if your lender cashes your monthly payment check and there isn’t enough in your account, you could end up with overdraft charges and have trouble getting loans in the future.

Auto loans

When you’re self-employed and have poor credit, getting an auto loan may be easier than getting approved for another type of loan. This is due to the fact that an auto loan, whether new or used, is usually always secured by the title.

When a buyer pays a down payment on a car, the lender is at less risk when they have a lien against the vehicle. Even the worst-case circumstances can frequently be financed by lenders who specialize in auto loans for those with a poor credit rating.

Sale-Leaseback: A Safer Option for Homeowners

If you own your home, you may have considered a home equity loan or home equity line of credit. Both are useful options for many people, but they’re not usually friendly to those with poor credit, though there are ways to get a HELOC with bad credit.

Selling your home is another way to get your equity, but moving is expensive, and leaving your home has all kinds of emotional baggage attached.

A sale-leaseback enables you to sell your home and remain in place as a tenant, paying rent until you’re ready to either move or repurchase the property. You don’t need good credit or tax returns, and the application is easy.

Key Takeaways

If you’re self-employed with bad credit, loans can be difficult to qualify for. However, there are options available. Talk to a financial consultant to decide which option is best for you.

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