Self-employed Americans make up about 10% of the nation’s workforce.
Although not a staggering percentage at first glance, 10% is 14.6 million self-employed individuals. All of whom have a non-traditional path to being accepted for a personal loan.
A personal loan for self-employed individuals can be hard to come by. Because income can’t simply be proved by a payroll document or pay stub, those who work for themselves, own their own businesses or are independent contractors/freelancers have to jump through a few extra hoops.
Whether you’ve been self-employed for many years, or are thinking about starting some freelance work, here is everything you need to know about self-employment and personal loan approval.
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What Does Self-Employed Really Mean?
Self-employment means working for yourself rather than an employer. These types of individuals earn money from a trade or business they operate, as opposed to a traditional employer-employee relationship or workplace.
The options for self-employment can be a sole proprietorship, independent contractor, a member of a partnership or limited liability company (LLC), among others. Some of these options can vary state by state as well.
How Many People Are Self-Employed?
There is conflicting research on the number of people who classify as self-employed. A questionable survey was released by Upwork and Freelancers Union, claiming that 35% of the workforce was freelancers.
However, that was debunked to reveal the truth—self-employed individuals and their employees account for 30%. And an even lower percentage are those without employees.
However, despite the misinformation, between the years 2001-2014, self-employment has increased by 32%. And this number is only continuing to grow.
Although the number may not be as high as some people once believed, self-employment does have the draw of working non-traditional hours, flexibility, and ‘being your own boss.’ And with the growth of people interested in, and starting to adopt this type of work, it’s important to know how to get approval for personal loans and what personal loans can provide.
What is a Personal Loan?
A personal installment loan can be used for any personal expense—from consolidating credit card debt to upgrading a home to purchasing an engagement ring—and it allows for low rates as a more flexible financing option.
The two options for personal loans are: secured or unsecured. An unsecured personal loan is often approved based upon financial status but doesn’t require collateral. Secured loans are usually secured by the asset that’s purchased.
Collateral is something that’s offered as security for the repayment of a loan. It’s an assurance for the lender that in case of a default on the loan, whatever’s been promised will be forfeited or seized.
How to Qualify for a Personal Loan for Self-Employed Individuals?
The approval process for self-employed individuals can be a little more complicated, simply because there is no traditional W-2 or pay stub that can be used to prove income (especially if an individual is just starting out).
This becomes even more difficult when a self-employed worker is looking for a payday loan, when they don’t have a traditional payday from an employer.
However, it is possible to obtain personal loans without tax returns.
If you’ve just started working for yourself, it may be tough to get documentation to prove your income. It’s often recommended to have two years of self-employment income in order to qualify, but it’s not absolutely necessary.
Here are some documents your lenders may require to prove your income:
You’ll need to provide documentation of your bank(s), both business and personal, for the past 3-6 months. Three months is typically all that’s needed, but you may want to gather more months for more valid documentation just in case.
Although this doesn’t necessarily prove your income, oftentimes lenders want to see legal documentation of your business (including state registration, business license, LLC form, etc.)
This includes profits and losses sheet or Schedule C form, your 1099-MISC forms, balance sheet, or any other documentation that proves your finances. It’s best, if possible, to have these signed/certified by a tax attorney.
It’s recommended to provide at least the past two years of tax returns (especially if you’re relatively new to self-employment).
If you receive money from renters this needs to be proved as a part of your income. Your lender will want to see how much you actually take home as well as any expenses you pay.
Other things a lender may consider are your bank history, credit score, how much collateral you can offer, your loan size, how much (or little) of a risk your loan may pose, and whether or not you’ll have a cosigner.
How to Apply for a Personal Loan?
There are a few options to apply for a personal loan if you’re self-employed.
An option to see if you qualify, or to obtain a personal loan is to get approval online. Visit the website of the bank you’re looking to get a loan from. Oftentimes the application is available and you can add your personal information. If you have an account with the bank already, you simply login first and then apply.
Visit the Branch
If you’d rather speak with someone in person, bring all the required documents with you to the branch. It might behoove you to make an appointment prior to showing up.
Over the Phone
If you’d rather not do the application online or make a trip, there’s the option to speak directly to a customer care representative on the phone. Make sure you have all the necessary documentation in front of you so you can reference it during the call.
Other Documents You Need to Apply:
- Signed and dated application (online or print)
- Proof of ID: Passport, driver’s license, state/voter ID
- Proof of age: Passport or birth certificate
- Proof of residence: Passport, utility bill or addressed mail
- Proof of signature: Passport, social security card
How to Apply for Personal Loan without Proof of Income:
It can be difficult to obtain a self-employed personal loan without proper documentation. However, it does happen. Typically when an individual is looking for a loan without proof of income (tax returns) lenders will consider two factors: projected debt-to-income ratio (DTI) and your overall risk.
If you rate high in one, sometimes you can still get approval based upon the lender’s requirements. However, these loans may be more risk for the borrower—a chance you, as a self-employed person, may have to take.
With a high DTI
You can get approved with a high DTI, but sometimes the amount of your loan may be reduced. If there is an ‘infinite’ DTI then approval may not happen at all.
High credit score
If you have a high credit score you may be approved, even without proof of income. Again, the principle amount for the loan may be lowered, but there is a chance that a high score (740+ preferred) can get you approved.
With bad credit
If you’re someone who has struggled with bad credit, it’s important to try to turn this around before applying for your loan. If possible, start using one of the best credit cards for bad credit to reverse the damage you’ve done.
Try to consolidate and slowly pay off your debt so that you can get a higher approval rating, prior to asking for a bad credit loan. However, if you can show consistent deposits into your checking account, or pledged significant collateral in your approval process, there is a chance you may be approved. Be sure to read your contract documentation carefully!
The Takeaways on Personal Loans and the Approval Process
Obtaining a personal loan no credit check for self-employed individuals can be challenging, but not impossible.
It’s important, first and foremost, to make sure you have ways of proving your income outside of a traditional W-2 or pay stub. This can be through bank statements, profits and loss documents, or even a high credit score.
You can also work around approval processes by helping yourself by paying off debts, offering collateral, or having a cosigner.
Whether you’re just starting as an independent contractor and looking to the future, or have been self-employed for a while and struggling with the loan approval process, here are a few tips. Hopefully, this helps you feel more prepared and confident moving forward with obtaining a personal loan.
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