A Personal loan can help self-employed people with various financial matters, from making large purchases to consolidating and refinancing debts. However, the unique circumstances and variable income of self-employment make finding and comparing personal loans a bit different. Self-employed people may have to take a few extra steps to find a loan that fits their needs. This article covers five tips for self-employed people to compare personal loans and pick the best potential option for their needs.
1. Review your income and credit score
Credit score and income are usually two of the most crucial factors lenders examine when lending to anyone, including the self-employed. Request your free annual score and report from three bureaus to see the official score. Use credit monitoring tools to check in regularly.
Check your monthly income. If it varies each month, get an average for the last 12 months.
2. Check documentation requirements
Lenders must feel confident about your income, so they may require different documentation from the self-employed who do not have a W-2 to account for variable income. Documents they may look for include:
- Several years of tax returns
- Several years of bank statements
- Profit/Loss (P/L) statements
Some lenders may also accept client contracts, invoices, and other business documents proving income. Regardless, knowing their documentation requirements ahead of time will help you save time when you apply and make the whole process easier. So, collect and organize these documents somewhere safe. It may be a good idea to have digital and physical copies so you can apply in person and online without issue.
3. Consider costs beyond interest rates
Your interest rate is a key factor affecting the loan cost, so it’s important to shop for the best rate. However, fees, penalties, repayment length and schedule, and other terms can impact the total loan cost. Some of these include:
- Origination fees
- Late fees
- Prepayment penalties
- Penalty interest rates
The Annual Percentage Rate (APR) is a great tool for comparing loans of similar size and length because it annualizes the interest and must include certain standard fees, like an origination fee. However, it does not include fees and penalties charged after the loan is in contract, like late fees.
4. Look into flexible terms if available
Since self-employed people’s incomes can vary monthly, they might prefer more flexible payment arrangements. Fortunately, some lenders offer flexible terms, such as adjustable payment schedules, to help adapt the loan to your financial situation.
For example, if you run a business with busy and slow seasons, some lenders may be able to build a repayment schedule that reduces payments during the slow seasons and makes up for them when you get busy again.
Furthermore, see if each lender you research offers temporary deferments or the ability to adjust payment deadlines without penalties. These could offer additional flexibility if business slows down in a particular month.
5. Find lenders who specialize in self-employed personal loans
Although regular lenders are still an option, finding those who specialize in self-employed personal loans may make the process easier. These lenders understand and cater to the unique needs of self-employed people. They know that self-employed people may have fluctuating income, business expenses, and additional tax responsibilities. Plus, they may be more willing to accept business documents that prove income, such as client contracts or invoices. Online lenders, credit unions, and peer-to-peer lending platforms all may have self-employed personal loan options. That said, research each lender to make sure they are reputable.
The bottom line
Getting a good personal loan while self-employed is possible. You’ll need to check your income and credit score and gather additional income documentation so the lender can understand your financial situation. While shopping, consider costs beyond the interest rates and see if lenders offer flexible repayment terms.
Working with a lender specializing in self-employed personal loans may help make the process even easier since they understand your circumstances. Following these tips will equip you to navigate the self-employed personal loan market and find options that help you reach your goals.
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