Personal Loan for Self-Employed
Who is Self-employed?
A self-employed individual is a person responsible for running their own business and not working as an employee for someone else. You could be a self-employed professional or a self-employed non-professional.
Self-employed professionals are persons with a special qualification in a specific field and have their own practice. Doctors, Engineers, Chartered Accountants, Advocates, Architects, and other persons who possess special qualification are considered as professionals. These professionals having independent practice and not working for someone else are considered as self-employed professionals.
Self-employed non-professionals are individuals who have set up businesses of the following types:
- Sole proprietorship
- As a partner in a partnership
- As a partner in a LLP (Limited Liability Partnership).
A self-employed non-professional is someone who owns an unincorporated business. You are self-employed if you carry on a business as a sole proprietor or as a partner in a Partnership or Limited Liability Partnership Firm.
Personal Loan Option for Self-employed Professionals
Self-employed individuals do not have a fixed income. Their income is normally assessed based on the average income as per their financial statements for the past two years. Due to non-availability of fixed income, most of them are of the impression that it will be difficult for the self-employed to get a loan. However, that is not so. If you have a good credit score and have the financial statements for the past two years, you can approach a financial institution for a Personal Loan.
Personal Loan Eligibility for Self-employed
The eligibility criteria for Personal Loan to Self Employed are as follows:
- Age of the promoter of the business should be between 21 years to 65 years
- Should have annual income of minimum 3 Lakhs to 5 Lakhs
- Should have been in the present business at least for a period ranging from 2 years to 5 years
- Should have been profit making for the past 2 years
- Should have a good credit score (700 or above)
- Should have the relevant audited financial documents like balance sheet, profit and loss statement and Income Tax Returns for at least 2 years.
- Should have 6 months bank statement to verify average bank balance, number of transactions and cheque bounces.
*Eligibility criteria may vary depending upon the bank you avail the loan from
Personal Loans for Self-employed with Bad Credit Score
Personal Loans are offered without any collateral security and will be an easy option for self-employed individuals to obtain quick funds for their day to day business operations and also to take their business to a different level. It is easier for salaried persons to get a Personal Loan since they have a stable income. However, for self-employed, the income is not fixed and so the risk factor is higher.
However, with a good credit score and audited balance sheet and profit and loss statements for a minimum of 2 years, it may not be difficult for them to get a loan.
A credit score is a tool to assess your discipline towards loan repayments. The minimum credit score required for a Personal Loan is above 700. If you have a bad score then it is presumed that you are defaulting in loan and Credit Card payments and will fall into the bracket of high-risk borrowers. A Personal Loan is an unsecured loan and in the event of default, the financial institutions do not have anything to fall back upon for recovery. Hence, they will be skeptical in providing unsecured loans to persons with a bad credit score. However, you need not be disappointed. There are yet other ways of securing a Personal Loan with a bad score.
If you are able to reason out for having a bad score, some banks may agree to provide you a loan with collateral security. Banks do CIBIL score verification even for secured loans, but in the presence of collateral security, they may be slightly lenient with respect to a credit score and provide a Personal Loan.
If you are an existing customer of the bank where you opt to avail the Personal Loan, then it would be easy for you to substantiate the reasons for defaulting in loan repayments. If you have been dealing with the bank for years and have had a good dealing earlier, the bank may still get convinced with your reasons for defaulting in repayments, viewing the past transactions in your account.
In the absence of a good score, it is ideal for a self-employed individual to go for a mortgage loan/ Loan against Property or a Gold Loan. Availing a mortgage loan could be an elaborate process, but Gold Loan will be best suited if you require immediate funds to run the business. Gold Loans are instant loans with a fairly easy procedure to follow.
To solve this bad score issue to some extent, some Fintech companies are using Artificial Intelligence and Machine Learning to create alternate lending data score for individuals who do not have a credit score or having a bad score. From the place where the individuals live, to the restaurants they visit, to their digital footprints on social media, Machine Learning captures it all. A lot of non-banking financial companies (NBFCs) and banks have a tie-up with these companies to obtain the data they are otherwise not able to collect
The next alternative would be to approach NBFCs. Some NBFCs are not very rigid when it comes to a credit score if a personal guarantee of a person with stable income and good for the loan amount is available. Also, it will be easier to obtain a loan if mortgage of the property as collateral security or pledge of gold as collateral security is available.
In all these cases the rate of interest applied will be significantly higher than the rate offered for loans with a good credit score. You must resort to taking these loans only if it is really required otherwise, you will unnecessarily acquire a heavy debt burden.
Personal Loans for Self-employed without Financial Documents
The income of a self-employed individual is assessed by the balance sheet, profit and loss statement and Income Tax Returns. Also, the transactions in their current account could give an idea of their income. If consistent credits are coming into their account from the same clients periodically, it indicates a stable income.
Banks generally insist for financial statements for a minimum of three years. The average income for the three years will be considered to assess the eligibility for the Personal Loan.
If you hold the necessary financial documents, then availing a Personal Loan would be a cake walk. Otherwise, it would be considerably difficult to obtain a Personal Loan since your repayment capacity cannot be evaluated without an income proof. However, you need not be disappointed. There are other ways of obtaining a Personal Loan in the absence of income proof.
Banks are usually stringent in respect of eligibility criteria and unless all the criteria are satisfied you will not qualify for the loan, but NBFCs are considerably lenient and they overlook certain criteria if an alternative is available.
In the absence of income proof, you can approach an NBFC and avail a secured loan. For this you will have to provide collateral security in the form of a Property, Shares, LIC Policies, Fixed Deposits or Gold. The rate of interest on these loans will be higher when compared to an unsecured loan when you have valid income proof and a good credit score.
If your fund requirement is immediate, then availing secured loan by pledging gold or fixed deposit will be ideal as they will be disbursed immediately.
Difference Between Taking a Personal Loan from Bank and NBFC for Self-Employed
With a lot of players in the market, the options are many to avail Personal Loans from either Banks or NBFCs, but before deciding on availing the loan it is important to know the difference between the two lending institutions.
The main difference is that banks are very stringent when it comes to eligibility criteria and the loan will be rejected in case all the stipulated criteria are not fulfilled. Having a good score and the required financial statements as income proof are crucial for availing loan from a bank.
NBFCs are slightly lenient in terms of eligibility criteria as compared to the banks. A self-employed individual with a bad credit score and without income proof has better chances of getting a Personal Loan from an NBFC rather than from a bank.
The rate of interest charged by NBFCs is higher when compared to the rate charged by the banks.
Factors Affecting Self-Employed Personal Loan Rates
The following are the factors affecting interest rates of Personal Loans to self-employed:
- Type of business: Whether you are a self-employed professional or a non-professional the conduct of the business for the past years is very important. If the business has been good for the past years and the income is stable, then there are chances of getting a better rate of interest.
- If the income as per Annual Income Tax returns is satisfactory and as per the requirement of the financial institution, the interest rate can be negotiated.
- Special rates are offered to self-employed professionals like Doctors, Engineers, and Chartered Accountants
Things to Remember for Personal Loan with Different Banks for Self-Employed
Before availing a Personal Loan, you have to conduct research in respect of the following details:
- Compare the rate of interest offered by different banks to strike the best deal
- Compare the EMI of different banks for the same amount of loan
- With the facility to apply for a loan online, the turnaround for a Personal Loan has come down drastically. You should compare the time taken for approval and disbursal of the loan by different banks.
- Processing fees charged for the loan differ from bank to bank. It is a one- time fee collected by the banks. The fee ranges from 0.50% to 2%. Compare the fees before taking the loan so as to arrive at the cost of the loan.
- When surplus cash is available, it is recommended to pre-pay or part-pay the loan which enables to reduce the cost of the loan. Banks charge a pre-payment/part-payment charge ranging from 2% to 5%. It is necessary to compare the charges before availing the loan in addition to all other aspects.
- Flexible repayment tenure will enable you to choose an EMI of your choice depending on the cash flow of your business. Compare the loan tenure offered by different banks before applying for the loan.
FAQs on Personal Loan to Self-employed
Who is considered as self-employed?
A self- employed individual is a person responsible for running their own business and not working as an employee for someone else. You could be a self-employed professional or a self-employed non-professional.
Self-employed professionals are persons with a special qualification in a specific field and have their own practice. A self-employed non-professional is someone who owns an unincorporated business.
What are the eligibility criteria for a self-employed individual to avail a Personal Loan?
The eligibility criteria for a Personal Loan to Self Employed are as follows:
- Age of the applicant should be between 21 years to 65 years
- Should have a minimum annual income of 3 Lakhs to 5 Lakhs (depending upon the bank you avail the loan from).
- Should have been in the present business at least for a period ranging from 2 years to 5 years (depending upon the bank from where you avail the loan).
- Should have been profit making for the past 2 years
- Should have a good credit score
- Should have the relevant audited financial documents like balance sheet, profit and loss statement and Income Tax Returns for at least 2 years
- A self-employed professional should have a proof of qualification and a valid licence to practice.
Can a self-employed person get a Personal Loan without a good credit score?
Yes. A self-employed person can get personal without a good credit score provided they provide collateral security in the form of property, shares, LIC policy, Gold jewellery or Fixed Deposit.
Can a self-employed person get a Personal Loan without income proof?
It will be difficult to evaluate the repayment capacity of the persona in the absence of income proof. Financial Institutions will be skeptical to provide an unsecured loan to such individuals. However, if security is available by way of mortgage of property, pledge of shares, gold, LIC policy or fixed deposit, then they may consider providing secured loans but with a higher rate of interest.
Is it possible to negotiate for the rate of interest in the absence of a good credit score and income proof?
If you are a customer of the lending institution and have had good dealings for years, this goodwill can be leveraged to negotiate for a better rate of interest.