5 Tips for Personal Loan for Self Employed

Being self-employed and starting your own business or your professional practice requires courage. However, creating a new business or expanding a current one requires extra finances. This is where many self-employed professionals turn towards personal loans. Since they are multi-purpose loans, it gives them the flexibility to use the loan amount as they deem fit. There are many reasons why you might opt to take a personal loan, such as;

• Meeting your personal expenses as your business takes off.
• Clearing existing dues of the business.
• Meeting sudden medical expenses of yourself or your team member.
• Covering travelling expenses for business tours.
• Investing in the expansion of your current business or starting a new one.

While personal loans come with the much-needed benefit of flexibility, making them perfect for self-employed, they often hit a roadblock when applying for such loans. With little or no income proof, they often stare at the inevitability of loan application rejection from the lender. Proof of income is an essential requirement for any loan as it defines your repayment capacity to the lender.Although it can surely be hard to get a personal loan for self-employed without any income proof, it is certainly not impossible. There are some ways you may still get the loan.Let’s look at some tips that can help you get a personal loan even if you don’t have any income proof yet.

Personal loans are unsecured loans, which means that borrowers do not have to pledge collateral for getting the loan. Thus, a CIBIL score or a credit score becomes one of the critical determinants while evaluating your eligibility. A credit score is a 3-digit score between 300 and 900 that defines your creditworthiness.A credit score of 750 and above is considered favourable by most lenders. If you don't have any income proof but hold a high credit score, it shows to the lenders that there is a higher chance of you repaying the loan. So what impacts your credit score? Well, various factors come into play, such as;

• Your Past Payment Records Whether you have already taken loans in the past or use a credit card, making your monthly payments(EMIs or monthly dues) in time can impact your credit score positively.
• Credit Utilisation Ratio (CUR) CUR is the ratio of credit utilised on your card to the credit limit granted to you. If your CUR is low, it indicates lesser reliance on debt for meeting your monthly expenses. A CUR of less than 30% can impact your credit score positively.
• Existing Debts If you have existing debts while applying for a loan or fetching your credit report, it can negatively affect your overall credit score. On the flip side, taking a smaller loan and closing it in time can impact your score positively.
• Applications for Loan This is one thing people with no income proof should watch out for. If you have applied at multiple places for a loan, it may represent your desperation to get a loan. This can impact your score negatively.

Sometimes your credit score may be low despite everything being in order. This may be due to a discrepancy in the report. If you find any errors, get them rectified by reporting them to the bureau.

if you don't have any income proof to show, you can consider adding a guarantor or a co-applicant to increase your loan approval chances. In such cases, the income of the co-applicant or guarantor is considered to determine your eligibility.Do note that a co-applicant is slightly different from a guarantor, with both of them serve the purpose of acting as the fall-back option for the lender if you fail to make loan payments. A co-applicant can also share the EMI burden, as per the terms defined in the loan contract.

The chances are that you do not have an existing relationship with the lender if you're thinking of applying for a loan with no income proof. However, you could still have an existing relationship with a bank or an NBFC through other products such as investments you may have made or other products that you may have taken. Lenders like borrowers they already know. This could not just help you get approval on your loans, but you might also be able to get a better deal on a loan.4. Income from other Sources: You may not have a primary income source yet with your business or professional practice just starting, but you may already be generating income from other sources that you can show as your total income to become eligible for the loan. Consider adding income from other sources if you have, such as;

• Income from your investments
• Rental Income on your property

While you may not have income proof to show, your bank statements may still look healthy, courtesy of some business transactions you may have just done recently in the current year. Most lenders ask for 3-6 months bank statements along with your other documents. If you maintain a healthy bank balance, it may impact your loan application positively.

When applying for loans you can either go to a bank or an NBFC (Non-Banking Finance Company). NBFCs can have a slight edge when it comes to applying for loans with no income proof. The reason is that while banks are regulated by the stricter Banking Regulations Act and have to maintain a certain reserve ratio, NBFCs under the Indian Companies Act can utilise 100% of their cash reserves for granting loans. This, along with other factors, allows them to be a bit more lenient than banks when granting loans.

While a personal loan for self employed comes with many benefits, as discussed before, sometimes you may still not be able to get it. In such situations, you can consider other secured loan options such as Loan Against Securities or Property if you own an asset or SME loan options such as secured business loans, unsecured business loans. Some of these loans come with better interest rates than personal loans and longer duration as well.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.