Are you a tradie, freelancer, contractor, or small business owner considering taking out a personal loan for self employed?
Although the process might look a bit different to someone with a fixed monthly income, it’s still entirely possible for you to successfully apply for a personal loan if you’re self employed.
Applying for numerous loans and being declined reflects poorly on your record, so be sure to do your research and gather the correct documentation before applying.
Here’s what you need to know.
Why Are Self Employed Personal Loans Different From Personal Loans For Employed People?
Lenders are more likely to approve someone with a stable income for a personal loan, as it’s considered less risky to them. This is because they have security in knowing that the borrower will receive a certain amount of money in their account at the end of every month.
Self-employed borrowers’ income streams can be unpredictable, and start-up businesses especially run a high risk of failure.
This means that lenders need more security from self-employed people before approving their loans.
Standard Personal Loan For Self Employed People
- the last two years’ full personal and/or company tax returns;
- the previous two years’ Notice of Assessment by the Australian Tax Office (ATO);
- your Australian Business Number (ABN), address, and license of the company; and
- recent bank statements showing proof of income, business transactions, profits and losses, outstanding loans or credit cards.
Secured Personal Loan For Self Employed People
A secured personal loan is a form of guarantee loan.
If you dishonour your payments and start accumulating debt, the lender may take the agreed-upon asset for themselves.
They then sell the asset and use the money to cover the costs incurred.
Guarantor Personal Loans For Self Employed People
Having a friend or family member employed full-time as a guarantor might be just the security the bank needs to approve your personal loan.
A guarantor is a third party who agrees to guarantee your loan using their assets.
The process of securing the loan stays the same: you apply to borrow money from a bank. But now, you’re offering the bank some security through the guarantor. The guarantee can use cash (like tucked-away savings or term deposit funds) or equity from their home to use as security.
They won’t need to give any funds directly to the borrower – it is simply a security measure.
The guarantor will be liable for the amount you borrow. That means that they’re promising to pay the lender the guaranteed amount if the borrower repay your loan and end up defaulting.
It’s worth noting, though, that the guarantor won’t be liable to pay your entire outstanding debt – they will only need to pay the amount they guaranteed.
This option could even offer you a better interest rate, especially if your guarantor has a good credit history.
The difficulty here is not necessarily the bank approving your personal loan, but finding someone willing to take your fall should push come to shove.
Types of Loans For Self Employed People
If you don’t have all the necessary documentation to secure a standard personal loan from a bank, there are other options to choose from.
The following types of loans are available from private lenders rather than banks. These types of lenders can be more lenient than banks that follow set procedures and protocols.
Each of these private lenders will have its own documentation requirements. They may also have additional fees and charges to cover themselves, so be sure to shop around.
1) Low Doc Loan For Self Employed People
Low documentation (low doc) loans are intended specifically for people who cannot produce the typical financial documents required by financial institutions.
Private lenders that offer low doc loans generally ask for documentation that might be easier for someone that’s in a self-employed capacity such as:
- a signed declaration of income statement;
- a letter from an accountant;
- your Goods and Service Tax (GST) registration; and
- any Business Activity Statements (BAS) that you have.
2) Specialist Self Employed Loans
Specialist lenders often have specific loans for different types of self-employed people, such as “loans for tradies” or “personal loans for ABN holders”.
These can be helpful because you may find a loan specialised in your particular situation. In this case, the lender will have experience working with borrowers like you, and the process will be more straightforward
3) P2P Loan For Self Employed People
Peer to peer loans operate on an online platform. The website connects borrowers with investors.
You apply for a loan online as a borrower. If your application is successful, the website will facilitate your pairing with an investor.
The fees and charges you have to pay are then divided between the website and the investor.
Changes to Loan Requirements (Updated For 2021/2022)
Some lenders in the market have started to roll out new policies for self-employed loans. A summary of general changes are as follows and will vary depending on the lender on a case-by-case basis:
- Two years’ financials and tax returns are required, and some accept one year.
- The last two years’ personal tax returns supported by the latest single year ATO notice of assessment (while it’s preferable to hold all pages of the ATO notice of assessment (NOA), the minimum requirement is for page 1 (the front page) of the ATO NOA to be held for the fully verified self-employed applicant).
- The last two years’ partnership tax returns (if a partnership) and financial statements showing two years of financial data corresponding to the tax returns provided, including profit and loss accounts and balance sheets.
- The last two years’ trust and/or company tax returns and financial statements (if a company/trust) including profit and loss accounts and balance sheets showing two years of financial data corresponding to the tax returns provided.
Mainstream Lender Example #1
On Monday 18th October, our policy was updated to demonstrate servicing solely utilising the salary a self-employed applicant pays themselves without relying upon the income generated by the business.
Qualifying criteria are that the applicant must have:
- had an ABN/ACN registered for a minimum of two years,
- paid themselves a regular and consistent salary on a weekly, fortnightly or monthly basis,
- a maximum LVR 80% (no LMI required), and
- no reliance on business income for servicing
Income is to be validated as per the following:
- two most recent consecutive payslips confirming consistent salary payment and including a ytd figure covering a minimum of three months, OR
- three months’ transaction statements confirming regular salary credits, AND
- a letter from an accountant listing all business names (including ABN/ACN) associated with the applicant and confirming that the business/es have made sufficient profits to meet business commitments and continue to pay the declared salary.
No variance in salary amounts will be considered (if the variance is < 15% then validation of salary can only completed utilising three months transaction statements). The salary is loaded as PAYG income in the personal tab of the serviceability worksheet.
Mainstream Lender Example #2
One of the following options may be used:
- six months’ salary credits to an account, or
- one payslip showing > six months YTD income, or
- one payslip showing < six months YTD income and most recent financial year PAYG payment summary/’tax ready’ income statement or tax return.
With each of the above options, a letter from the customer’s accountant on a company letterhead is required and must advise:
- the date the business began trading,
- the company has made sufficient profits to meet the businesses commitments, and
- continue to pay the salary the customer has declared.
The following caveats apply:
- This verification method can only be used where the customer is paying themselves a regular salary for a minimum period of 6 months, evidenced through payslips or salary credits and income from the business is not required for servicing.
- The salary must be paid on a consistent frequency (e.g. weekly, fortnightly or monthly) and must be able to be evidenced as salary from the related business entity. Where the salary is not paid on a consistent frequency or it cannot be evidenced it is from the related business entity, this verification method cannot be used.
- The ‘full verification’ method must be used to verify self-employed income where additional income from the Business is required to demonstrate servicing.
Talk to a Professional
Any significant financial decisions should be made under the guidance of a financial advisor or mortgage broker.
They can assess your current financial situation, your future goals and provide steps and strategies to help you reach them.
Self-employed people who has the correct have substantial documentation can benefit from applying for a standard personal loan through a bank and enjoy lower fees and charges.
You could also consider a secured personal loan or a guarantor personal loan.
Other types of loans for self-employed people can be through private lenders. These include low doc loans, specialist loans, and P2P loans.
Being denied a loan reflects poorly on your credit score, so it is worth speaking to a professional before being hasty and making decisions you will regret.
Regardless of your employment situation, taking out a personal loan is possible with the right guidance.
It might take a while to collect all the correct documentation, but knowing exactly what documentation you need is a good place to start.
Don’t struggle with this alone. Contact The Mortgage Agency today to assist you in this process.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.