The thrill of working for oneself, work on a project from start to finish, limitless income, making full utilisation of one’s skills are a few things that propel people to become self employed. These people might need a loan either for their personal or for their business need. These loans are known as self employed loans.

Self employed loans characteristics:

1. The profits from the business operations are related to the repayment capacity of the self employed people
2. Regular repayment schedules where borrowers amortise loan balance through fixed monthly repayments may not be suitable for the self employed since profits are largely irregular.
3. Insufficient proof of income forms a distinct characteristic of self employed people. A mainstream lender will want to see at least 3 years audited accounts as proof that your business has done well over that time.
4. Overpayments, underpayments, and payment holidays are some of the features of the repayment schedule in case of the self employed.
5. The degree of risk posed by the self employed borrowers is more. So the APR charged on self employed loans is more than the regular loans.

Self employed loans can be either secured or unsecured. The choice of the type of loan depends on the requirements of the borrower. Secured self employed loans are available at lower interest rates because the loan amount is given against some security. The security is usually home and real estate. This type is loan is suitable for taking a larger loan. Unsecured loans are available at higher interest rates and will not require any security. Since the interest rates are high unsecured loans are better suited for taking smaller amount loans.

Advantages of secured loans for the self employed:

1. Low interest charge.
2. Some lending institutions don’t ask for any accounts.
3. No proof of income might be required.
4. Loan amount can be used for any purpose.
5. Loan amount given is 1-1.5 times of the value of the collateral.

These advantages come to the borrower because the collateral clause is satisfied by a secured loan. It pacifies the average lender and he provides the loan in spite of a lack of regular income. The collateral can be a house, a car, a property etc. held by the self-employed person. A diverse spectrum of professionals like painters, writers, doctors, mechanics, florists, beauticians etc. take such loans. The profession of the self-employed is not given much importance in case of secured loan processing for the self-employed as long as the collateral satisfies the lender.

However, the credit history of the borrowers carries a lot of weight for the lenders. Any self-employed person who offers sufficient collateral and has a good credit history to supplement can get a good loan offer within minimum possible time. On the other hand a borrower with insufficient collateral and a poor credit history is likely to get a reduced loan with high interest rates and tougher repayment options.

The drawback of secured loans for the self-employed is that if the borrower is unable to meet the repayment schedule and repeatedly defaults on installments, he might loose the pledged collateral to the lender permanently. So, to mitigate the risk the borrower should go for the minimum possible loan amount after considering his repayment capacity and doing a cash flow analysis.

Taking a secured loan for self-employed could be vital to the borrower from a personal or business point of view. The loan amount should be used efficiently and solely to fulfill the objective of taking the loan. This would ensure that the borrower does not land himself/herself in trouble later. So the borrower should enjoy the freedom of taking a larger loan but do have the responsibility of making the payments on time.

Brief summary

Self-employed people need a loan either for their personal or for their business need. The profits from the business operations are related to the repayment capacity of the self employed people. Insufficient proof of income forms a distinct characteristic of self employed people. Overpayments, underpayments, and payment holidays are some of the features of the repayment schedule in case of the self employed. Secured self employed loans are available at lower interest rates because the loan amount is given against some security. The security is usually home and real estate. This type is loan is suitable for taking a larger loan.

The advantages of secured loans for the self employed are low interest charge, no proof of income required, loan amount can be used for any purpose etc. The profession of the self-employed is not given much importance in case of secured loan processing for the self-employed. However, the credit history of the borrowers carries a lot of weight for the lenders. If the borrower is unable to meet the repayment schedule and repeatedly defaults on installments, he runs the risk of losing the pledged collateral to the lender permanently. So, to mitigate the risk the borrower should go for the minimum possible loan amount after considering his repayment capacity and doing a cash flow analysis. The borrower should enjoy the freedom of taking a larger loan but do have the responsibility of making the payments on time.