Self-employed personal loans: your questions answered

The freedom of working for yourself also comes with a lot of hard work, especially when it comes to sorting out your finances.

If you’re self-employed and looking to take out a personal loan, we’re here to help answer some of the big questions.

A self-employed personal loan is like any other personal loan but refers to loans for people working for themselves. 

As with any loan, a self-employed loan involves the borrowing of a set amount of money. You’ll pay that amount back over a set period of time (this is called the “term” of the loan), usually in monthly instalments, along with any fees and interest collected over the term.

Being self-employed shouldn’t necessarily stop you from taking out a loan, but there are other factors at play.

Lenders are far more likely to be interested in your creditworthiness – that is, how you’ve demonstrated your ability to pay back debt in the past. Some lenders may require you to demonstrate a source of income, which can be more difficult if you are self-employed. 

Showing your eligibility can be easier if you’re able to display an excellent credit history and strong evidence of savings, amongst other things. 

All these things can make this tricky process a little bit easier.

Like any personal loan, self-employed loans fall into many categories.

• Secured: A secured loan uses a valuable asset (like a car or a property) to give the lender added assurance that you’ll pay it back. If you default on your repayments, they can sell your asset to reclaim some of their losses. A common example of this would be a car loan. Secured loans are higher risk for you (as you have assets on the line), but they also tend to come with lower interest rates and may be easier to get if you don’t have clear proof of income. 
• Unsecured: In contrast, unsecured loans aren’t held against any of your possessions. This means that there’s no risk of your things being repossessed! This also means that rates on unsecured loans tend to be higher because they’re higher risk for lenders. 
• Fixed-rate: A fixed-rate loan keeps the same rate for the full term of the loan. These are easy to plan around, as you know exactly how much interest you’ll have to pay over the life of the loan. Because of this security, these loans tend to have higher interest rates. 
• Variable rate: On the other hand, a variable rate loan can shift over the course of the loan. For short-term loans, this may not have a major impact, but it can mean substantial changes over a longer period (for example, a 5-year loan). These loans often offer lower interest rates.

Self-employed personal loans can be used for a variety of things. These are often good options for freelancers and contractors. If you are instead running a business with employees, you may require a small business loan.

If you find yourself falling into the low-income category, you might want to consider a low-income personal loan.

It’s important to make sure that your self-employed loan has features that suit your needs. These can be extra valuable if you’re setting your own work hours or have an irregular payment schedule, as the features on a loan can make it much easier to pay back.

• Flexible repayment schedule: If you’re paid irregularly, are a freelancer or a business owner who pays yourself, you might want a loan with flexible repayment options so you can choose between either weekly, fortnightly or monthly regular repayments. This not only means you could potentially pay your loan off faster by opting for fortnightly repayments (vs monthly payments), but you can line payments up to when you have money coming in.
• Extra repayments: Likewise, if you’re self-employed and receive money at unexpected intervals, being able to make extra repayments on your loan can be super handy. The quicker you repay a personal loan, the less interest you’ll pay. Some loans do charge for this ability, however, so make to read the details. 
• Redraw facility: Being your own employer and employee can come with unexpected costs. Having a redraw facility lets you dip into the money you’ve paid on your personal loan, which can be useful in emergencies. Be aware that not all lenders allow redraws, and some of those that do will charge a fee for it. 
• Early repayment or break-free costs: If you’re in a position to pay your loan off early, why wouldn’t you? Well, some lenders charge significant early repayment fees if you try to. So, if you’d like to pay your loan off early, then being able to do so without additional charges is a huge benefit. 
• Speed: When you’re self-employed, time is often of the essence. So, if you need money quickly, online and peer-to-peer lenders may have faster approval times than larger brick-and-mortar banks.

As with any loan, when applying for a self-employed personal loan – preparation is key.

Get all the relevant information ready:

Have all the necessary documents (like identification, proof of income, and any relevant tax statements) ready to go.

They might also require proof of savings, recent bank statements, and company information (if you run a business), among other things. Ideally, contact the lender beforehand to ensure you know which documents you need.

Low-doc loans:

Alternatively, you might look into a low doc (“low documentation”) loan, which typically requires less documentation than the average loan. Low-doc loans can be helpful if you can’t demonstrate proof of income or savings.

Because of how little documentation they require, these loans have restrictive conditions and high interest rates, so they may not be an ideal option.

If you’ve decided to take out a personal loan, here are some steps to take to help you find a competitive deal.

1. Work out what you can afford: First, use our free personal loan repayments calculator to determine how much you can afford to borrow and pay back. 
2. Compare your options: Once you know what you can afford to borrow, you can compare personal loans from the Mozo database to find one that suits your needs. Remember to look for the features you want, plus check for any upfront fees and ongoing costs that will contribute to the price of the loan. 

Here are some personal loan options below to help start your search with:

If you’re still on the hunt for a personal loan, check out Mozo’s picks for the best personal loans. If you’re self-employed and want to know whether you should be looking at life insurance or if you can get a home loan, we’ve got you covered!