Personal Loan for Self-Employed

A self-employed individual is a person responsible for running their own business and not working as an employee for someone else. You could be a self-employed professional or a self-employed non-professional.

Self-employed professionals are persons with a special qualification in a specific field and have their practice. Doctors, Engineers, Chartered Accountants, Advocates, Architects, and other persons who possess special qualifications are considered professionals. These professionals having independent practice and not working for someone else are considered self-employed professionals.

Self-employed non-professionals are individuals who have set up businesses of the following types:

• Sole proprietorship
• As a partner in a partnership
• As a partner in an LLP (Limited Liability Partnership).

A self-employed non-professional is someone who owns an unincorporated business. You are self-employed if you carry on a business as a sole proprietor or as a partner in a Partnership or Limited Liability Partnership Firm.

Self-employed individuals do not have a fixed income. Their income is normally assessed based on the average income as per their financial statements for the past two years. Due to the non-availability of fixed income, most of them are of the impression that it will be difficult for the self-employed to get a loan. However, that is not so. If you have a good credit score and have the financial statements for the past two years, you can approach a financial institution for a Personal Loan.

With a lot of players in the market, the options are many to avail Personal Loans from either Banks or NBFCs, but before deciding on availing the loan it is important to know the difference between the two lending institutions.

The main difference is that banks are very stringent when it comes to eligibility criteria and the loan will be rejected in case all the stipulated criteria are not fulfilled. Having a good score and the required financial statements as income proof are crucial for availing loan from a bank.

NBFCs are slightly lenient in terms of eligibility criteria as compared to the banks. A self-employed individual with a bad credit score and without income proof has a better chance of getting a Personal Loan from an NBFC rather than from a bank.

The rate of interest charged by NBFCs is higher when compared to the rate charged by the banks.

The eligibility criteria for personal loan to self employed are as follows:

• The age of the promoter of the business should be between 21 years to 65 years
• Should have an annual income of a minimum of 3 Lakhs to 5 Lakhs
• Should have been in the present business at least for a period ranging from 2 years to 5 years
• Should have been profit-making for the past 2 years
• Should have a good credit score (700 or above)
• Should have the relevant audited financial documents like balance sheet, profit and loss statement, and Income Tax Returns for at least 2 years.
• Should have 6 months bank statement to verify average bank balance, number of transactions and cheque bounces.

Personal Loans are offered without any collateral security and will be an easy option for self-employed individuals to obtain quick funds for their day-to-day business operations and also to take their business to a different level. It is easier for salaried persons to get a personal loan since they have a stable income. However, for self-employed, the income is not fixed so the risk factor is higher.

However, with a good credit score and audited balance sheet and profit and loss statements for a minimum of 2 years, it may not be difficult for them to get a loan.

A credit score is a tool to assess your discipline towards loan repayments. The minimum credit score required for a Personal Loan is above 700. If you have a bad score then it is presumed that you are defaulting in loan and Credit Card payments and will fall into the bracket of high-risk borrowers. A Personal Loan is an unsecured loan and in the event of default, the financial institutions do not have anything to fall back upon for recovery. Hence, they will be skeptical about providing unsecured loans to a person with a bad credit score. However, you need not be disappointed. There are yet other ways of securing a personal loan with a bad credit score.

The income of a self-employed individual is assessed by the balance sheet, profit and loss statement, and Income Tax Returns. Also, the transactions in their current account could give an idea of their income. If consistent credits are coming into their account from the same clients periodically, it indicates a stable income.

Banks generally insist on financial statements for a minimum of three years. The average income for the three years will be considered to assess the eligibility for the Personal Loan.

If you hold the necessary financial documents, then availing a Personal Loan would be a cakewalk. Otherwise, it would be considerably difficult to obtain a Personal Loan since your repayment capacity cannot be evaluated without an income proof. However, you need not be disappointed. There are other ways of obtaining a Personal Loan in the absence of income proof.

Banks are usually stringent with respect to eligibility criteria and unless all the criteria are satisfied you will not qualify for the loan, but NBFCs are considerably lenient and they overlook certain criteria if an alternative is available.

In the absence of income proof, you can approach an NBFC and avail a secured loan. For this, you will have to provide collateral security in the form of a Property, Shares, LIC Policies, Fixed Deposit, or Gold. The rate of interest on these loans will be higher when compared to an unsecured loan when you have valid income proof and a good credit score.

If your fund requirement is immediate, then availing secured loan by pledging gold or a fixed deposit will be ideal as they will be disbursed immediately.

The following are the factors affecting interest rates of personal loans to self-employed:

• Type of business: Whether you are a self-employed professional or a non-professional the conduct of the business for the past years is very important. If the business has been good for the past years and the income is stable, then there are chances of getting a better rate of interest.
• If the income as per Annual Income Tax returns is satisfactory and as per the requirement of the financial institution, the interest rate can be negotiated.
• Special rates are offered to self-employed professionals like Doctors, Engineers, and Chartered Accountants

Before availing a Personal Loan, you have to conduct research in respect of the following details:

• Compare the rate of interest offered by different banks to strike the best deal
• Compare the EMI of different banks for the same amount of loan
• With the facility to apply for a loan online, the turnaround for a Personal Loan has come down drastically. You should compare the time taken for approval and disbursal of the loan by different banks.
• Processing fees charged for the loan differ from bank to bank. It is a one-time fee collected by the banks. The fee ranges from 0.50% to 2%. Compare the fees before taking the loan to arrive at the cost of the loan.
• When surplus cash is available, it is recommended to pre-pay or part-pay the loan which enables to reduction of the cost of the loan. Banks charge a pre-payment/part-payment charge ranging from 2% to 5%. It is necessary to compare the charges before availing of the loan in addition to all other aspects.
• Flexible repayment tenure will enable you to choose an EMI of your choice depending on the cash flow of your business. Compare the loan tenure offered by different banks before applying for the loan.