When determining whether an applicant qualifies for a personal loan, lenders look at the stability and security of income. Ultimately, this can work against the self-employed whose income streams are often volatile and inconsistent. In practice, this means that the self-employed must provide more documentary evidence of their financial position and income. This article covers the process of getting a personal loan as a self-employed worker including the paperwork you will need to provide and the problems you may face.
Are Self-Employed Entrepreneurs Eligible for Personal Loans?
Actually, self-employed people have the right to apply for their personal loans offered by financial institutions. Eligibility for personal loans is mainly related to the borrower’s income along with a credit rating but at MoneyZap you can try to take a loan even if your credit rating is low. Since self-employed hirelings do not have the identical stable income as full-time employees, they are able to make enough money to authorize, especially if they have good creditworthiness.
Will a Personal Loan Be More Costly for Self-Employed Borrowers?
Although it is related to a specific financial issue, loans for self-employed workers are not constantly expensive unlike personal loans for employees. Any lender has a different strategy for evaluating the applicant’s finances. Moreover, lenders who focus on credit score more than on income cannot punish self-employed workers if they have a satisfactory credit score.
In addition, a lender who pays more attention to secondary aspects such as work experience, skills and education may offer similar loan rates to self-employed workers. Nevertheless, lenders seek income consistency. Therefore, the innately precarious nature of contracting may cause lenders to view the self-employed as more risky. As a higher-risk personal loan candidate, the self-employed may face higher interest rates. Self-employed persons still can consider using a job seeker who is likely to help them get a lower interest rate.
How is the Personal Loan Procedure?
To get a personal loan, you need to apply online or at the office of a microfinance organization. Online registration is available even to residents of small settlements where there are no branches of financial institutions.
Apply for in an Office
To apply for a personal loan in the office, you need to come with the documents and submit an application. Employees will check the passport, ask you to sign an agreement and consent to the processing of personal data. Sometimes money is given out on the same day but sometimes they ask to wait a little longer.
It is much more interesting to arrange a loan online “in one click.” To receive money, any smartphone, computer, tablet with an Internet connection is suitable. The procedure is as follows:
- Registration on the MFO website: in the electronic questionnaire you need to indicate your full name, registration address, passport number, mobile number.
- Confirmation of the phone number: after registration, an SMS with a code will be sent to the phone which will need to be entered into a special field on the MFO website.
- Submission of an application: it is necessary to indicate the desired amount and term of the loan.
- Confirmation of the application via SMS with a code.
- Choosing a way to get money.
- Crediting the entire amount of the microloan.
By What Criteria Do MFIs Decide to Lend Money to a Client?
After the client has submitted an application, the microfinance company reviews it and decides whether it is possible to lend money to this person. Basically, applications are considered by a computer program that contains very complex algorithms. If the application is not automatically approved, it goes to a specialist of the microfinance company for consideration. In most cases, automatic processing of an application received from a client is sufficient. This means that the MFI will transfer money to the borrower within a few minutes. This process is scientifically called scoring.
It is necessary to assess the risk of default by the borrower. It is someone who makes it possible to instantly receive a personal loan for self-employed immediately after a person has applied. Own scoring system is one of the advantages of MFIs issuing personal loans. Analysts at each company develop algorithms that allow a computer program to very accurately assess the risk of a borrower’s default in a few minutes. Many factors are taken into account. We have compiled only an approximate list:
- age, gender, marital status, children;
- whether this person has previously contacted an MFI;
- credit history;
- the device from which the application has been submitted;
- the speed of application submission;
- mobile operator providing communication services.
Separately, this information can tell practically nothing about the client. But if we compare the data, for example, marital status, the number of children and income, then a portrait of the borrower emerges. If the borrower is roughly 60 years old and uses an iPhone, this may alert and raise questions from some lenders offering personal loans.
Age of Borrowers
The borrower’s age can be from 18 years. Some microfinance companies refuse elderly retirees. However, such cases are rather rare, unless a borrower is 90 years old. The MFI’s logic is simple: a pensioner has a permanent source of income in the form of social security, that is, be able to pay off the loan. Do not forget that people of retirement age in most cases have good financial discipline and do not like to go into debt. Microcredit companies are well aware of this.
Why Do MFIs Refuse Clients Several Times Rarer Than Banks?
It is thanks to scoring mechanisms that microfinance companies make decisions faster than banks and refuse to people several times less often. According to the National Rating Agency, MFOs are rejected in 10-15% of cases. For banks, these figures are several times higher.
If you’re looking for loan advice and want to borrow without having to worry about a credit check, consider using PaydayPot. This company offers short-term loans in increments as small as $100, and no credit check is required.
Plus, if you manage your loan successfully, you could even qualify for a loan modification or forgiveness program. So if you need some quick cash but don’t want to go through the hassle of applying for a traditional loan, payday loans might be the solution for you. Just be sure to compare terms and rates carefully before making a decision.
Often, clients of microfinance organizations are people who were refused by banks for various reasons when they tried to take out a personal loan. Someone cannot present a certificate of income being employed unofficially. Someone is paying off the personal loan in full. Consequently, the bank does not want to risk increasing the debt burden on a borrower. All these problems become unimportant for MFOs.