Loans for Self-Employed Borrowers with Low Credit Score – What Are Your Options?

Jun 15, 2019
Loans for Self-Employed Borrowers with Low Credit Score – What Are Your Options?

When you're self-employed, things like applying for a loan can be more challenging than they are for employees. Banks and other traditional lenders love the certainty of a stable employment contract. When you don't have that, they make you jump through a lot more hoops.

It can be even harder to find loans for small business owners and self-employed people with bad credit. But let's not go into the details of how or why you might get rejected, let's look at how you might get approved.   

How do you apply?

As a self-employed person, you need extra documentation to prove that you can afford the loan. Lenders usually ask for some combination of the following:

  • Two years of tax returns, including Schedule C (business profit/loss statement) and Schedule SE (self-employment tax) forms 
  • Bank statements, if you're applying for a secured home loan or small business loan 
  • Your credit score 
  • Your debt-to-income ratio, or DTI

If you're able to provide two or more years of tax returns showing consistent income from your business, your lender might be less likely to ask for your credit score or DTI. That said, if you're looking specifically for loans for self-employed people with bad credit, you might have more trouble.

What do lenders consider to be bad credit?

Lenders usually evaluate your credit using the FICO scoring system, which collects information about your borrowing history and rates it on a scale of 300 to 850. The higher your score, the less risk you pose to lenders.  

Technically, there is no rubric for determining whether a credit score is “good” or “bad.” FICO leaves it to the lender to determine how much risk they're willing to tolerate in a borrower. In general, though, this is how it usually breaks down:

  • 720 or higher = Excellent 
  • 690-719 = Good 
  • 630-689 = Fair 
  • 300-629 = Bad

If your score is in the “bad” range, you're not alone. FICO reports that 20 percent of borrowers have credit scores under 600, and another 10 percent is in the 600 to 650 category. Of course, if you're self-employed and your bad credit is keeping you from getting a loan, these percentages might be small comfort.

Loans for the self-employed with bad credit

Big banks are less likely to take a chance on someone with bad credit, but there are plenty of lenders out there that will. Here are just a few examples.

Credit unions

Credit unions are local nonprofits that offer financial services to members. Each one restricts its membership in some way as part of its charter, but some are broad enough that everyone who lives or works in a particular area is welcome.

Because credit unions exist to serve their members and not to make a profit, their lending requirements tend to be more lenient. They look at your entire financial picture and not just your credit score and bank balance, and that means you have a chance to make a case for yourself.

If your score is low, credit unions will probably still require you to pay a higher interest rate, since they have to make up for the risk. And even getting a loan could require the union to conduct a hard credit check, which could make your score drop further.

Peer-to-peer lenders

Just like Uber changed the way you call a taxi and Airbnb changed the way you book travel, online peer-to-peer lenders are creating a new paradigm in lending. Instead of working through a big bank or loan company, you apply online and match with an individual investor.

Peer-to-peer lending, also known as P2P, tends to be more affordable than traditional borrowing because you're not paying a company's overhead fees. The application process tends to be easier and you might find more options for someone with less-than-perfect credit.

As with any loan, however, you'll pay more in interest if your credit is bad. Combined with the relatively high loan origination fees you'll probably pay, this can make peer-to-peer lending less affordable.

Payday loans

Payday loans are famous for being easy to get if you have bad credit. They don't require a credit history or credit score – in fact, they're often called “no credit check loans.” Instead, you write a check for the borrowed amount plus a fee and the lender cashes it when the time comes to repay.

They're intended to be short-term solutions, largely because they come with high interest rates. Lenders communicate these rates as fees, so you don't always know how much you're agreeing to pay.   

For instance, you might to borrow $200 with a $40 fee and expect to pay it back within two weeks. But what you're actually signing on for is an annual percentage rate (APR) higher than 500 percent, and it could keep accumulating. If you can't afford to pay quickly, you can easily end up owing much more than you borrowed.   

Also, if your lender cashes your repayment check and there isn't enough in your account, you could end up with overdraft charges and have trouble getting loans in the future.

Sell and Stay: A safer option for homeowners  

If you own your home, you may have considered a home loan or home equity line of credit. Both are useful options for many people, but they're not usually friendly to those with bad credit.   

Selling your home is another way to get your equity, but moving is expensive and leaving your home has all kinds of emotional baggage attached.

That's why EasyKnock developed Sell and Stay. It's a unique program that enables you to sell your home and remain in place as a tenant, paying rent until you're ready to either move or repurchase the property. You don't need good credit or tax returns, and the application is easy.

In two minutes, you could find out if Sell and Stay is an option for you. Don't spend another day worrying how you're going to make ends meet and improve your credit – check out Sell and Stay now.