We all need some help from time to time, even contractors. Sometimes it seems like personal loans weren’t designed for contractors. The loan application asks for recent pay stubs or your employer’s tax information. You tell them that you’re an independent contractor, and suddenly they need a lot more documentation to verify your eligibility.
Who Qualifies for Personal Loans for Contractors?
According to the IRS, an independent contractor is a professional who provides services to other businesses or individuals. Personal loans payers for contractors do not:
- Control how the contractor does the work
- Determine payment schedule, reimbursements, or other financial aspects of the relationship
- Provide the contractor with an employment contract or benefits
- Maintain an ongoing relationship with the contractor after the job ends
If you fall into this category, you don’t get the kind of paychecks that banks accept for loan approval. Instead, you need to offer alternative documentation.
Applying for Personal Loans as a Contractor
As an independent contractor, personal loans are hard to get because you aren’t able to produce an employment agreement. That makes you a bigger risk for a business loan lender because they have less proof that you will have ongoing income. You have to prove that your finances are strong enough for the lender to take the risk for the loan amount, and this requires a bigger stack of paperwork.
It’s very likely that for loan processing you will need to provide a lender with:
- Your credit score
- Information about existing loan obligations
- At least one year of tax returns
- An estimate of your typical monthly income
- Personal identifying information
- Paperwork requirements for independent contractor loans may vary among lenders and the small business loan amount. If you have these documents ready, however, you can usually provide whatever an application requests such as gross income, a bank statement, payroll, or gross receipts.
5 Loans for Independent Contractors
1. An Unsecured Personal Loan
If you have good credit and detailed income records, your best bet as a contractor needing personal loans may be to apply for an unsecured loan. These independent contractors need personal loans that don’t involve collateral from the sole proprietor, so the lender can’t take your property if you default. They can, however, send your bill into collections and damage your credit score.
Also, because lenders can’t use collateral to reduce its risk, they might make up for that risk by charging you a higher annual percentage rate (APR) than they would demand from an employee.
If You Don’t Qualify
If you don’t qualify for an unsecured loan due to bad credit or lackluster bank statements, you might be able to apply for a secured loan. To get one of these, you have to pledge a particular asset that the lender can seize if you don’t pay back the loan. Cars, savings accounts, and CDs (Certificates of Deposit, not Compact Discs) are common examples of collateral for secured loans. Emergency loans for poor credit can also be a viable option if your back is up against the wall and you’re looking for a quick solution.
2. A Variable-Rate Loan
As its name implies, a variable-rate loan, unlike payday loans, includes an interest rate that is subject to change. These loans usually offer lower initial interest rates to sole proprietors than fixed-rate options, but that is because you agree to carry the burden if interest rates rise. The risk tends to be greater the longer you have the loan, so a variable-rate loan might be ideal if you plan to pay off the loan quickly.
When It Works
Variable-rate loans can be great for contractors looking for personal loans if they get lump-sum payments irregularly as their net income, as long as they have a stable financial cushion. That way, if interest rates rise and they need to pay back the loan quickly, they don’t have to wait until their next check comes in.
3. A Personal Line of Credit
A personal line of credit lets you get approval for a particular amount, but you don’t have to use all of it. You can borrow from that line of credit up to its maximum and only pay interest on what you take. Usually, repayment starts immediately and requires a minimum rather than a set payment, much like a credit card.
These personal loans can work well for independent contractors or self-employed individuals because they let you fill in the gaps when income or owner compensations. It doesn’t require collateral from the sole proprietors, but it does require an excellent credit score, usually at least 680.
4. A Debt Consolidation Loan
Acting as a small business owner of sorts, independent contractors have to pay for things that employees often have covered, from office supplies to workspace rental fees, and not to mention they need to set aside their owner compensation share. These expenses sometimes add up to more than you have coming in net profit, especially if your business has natural ebbs and flows.
Contractors in this position who need personal loans may benefit from a debt consolidation loan. These give you the money that you need to pay back your existing debts.
Debt consolidation loans tend to work best if:
- Your debt is less than 50 percent of your income
- Your credit is good enough to qualify for an attractive interest rate
- You have a reliable enough income to make regular payments
- You can avoid getting back into debt
Many contractors and small business owners find that a debt consolidation loan is easier to repay than multiple separate bills, particularly if the loan has a low-interest rate.
5. A Co-Signed Loan
If you don’t have a stellar credit history or if you’re still building one up, you might get better results with a co-signer.
You’ll want to find someone with a solid payment history and reliable income verification. A lender who will accept this person might have more confidence and give you a loan with an attractive interest rate. Assuming you’re able to pay it back, it could help you to build a good credit history.
An Alternative to Borrowing
Personal loans are risky, no matter what kind you get. Either you put one of your major assets on the line or you risk damaging your credit score, which is your primary proof of good financial status if you’re a self-employed individual.
You do have another option. A sale-leaseback program lets you sell your home but remain in place as a renter. You convert the equity you have built to cash without taking on a loan, and you don’t even have to move. For contractors in need of personal loans, this could be a viable alternative.
Don’t let your financial struggles in the present cause more trouble in the future. Contractors looking for personal loans have options. Talk to a financial advisor about what options might be best for your needs.