Personal loan for self-employed: 7 key tips to follow to overcome challenges | Mint

If you are short of funds, it is acceptable to explore the prospect of raising a personal loan to meet your needs. The purpose of raising funds could range from organising a wedding to go on a vacation, or to buy an expensive item, among others. Whatever the reason could be — a personal loan comes handy to offer much-needed solace when you need it the most.

Typically, before banks disburse a personal loan, they examine the past few months’ salary slips and CIBIL score. However, not many are aware that even self-employed persons can also claim personal loan for any of the needs mentioned above.

These are some of the challenges they face:

1. Inconsistent income: Banks tend to worry over inconsistent cash flow and ability to repay during slow months.

2. Higher rates of interest: Some lenders may levy higher rates of interest on self-employed individuals since they are perceived to be high-risk borrowers.

3.  documents needed: In order to convince banks to disburse loans, self-employed persons are meant to submit more documents than their salaried counterparts.

4. Shorter tenure: Banks may usually offer shorter loan repayment tenures to self-employed borrowers, thus leading to higher instalments.

5. Reconciling actual income with reported income: A number of self-employed individuals underreport income for tax purposes, which can hurt their loan eligibility.

7 key tips to follow to overcome these challenges:

1. High credit score: It’s imperative to maintain a high credit score. A CIBIL score of over 700 raises the chances of approval.

2. Financial documents: Banks often require more extensive documentation from self-employed individuals. These documents include at least 2 to 3 years of income tax returns (ITR), and 6 to 12 months of bank statements to show consistent cash flow. Besides these, banks may require profit and loss statements and accounts receivable to indicate future income.

3. Income growth: Stable or growing income over the last few years is usually preferred. In case it fluctuates, one should explain it with supporting documents. Additionally, a business that’s been running successfully for at least 2 to 3 years reassures lenders.

4. Co-signers or collateral: A co-signer with stable income or good credit can improve your application. Secured loans (backed by assets like property or investments) often have lower interest rates and easier approval.

5. Choose lender wisely: Traditional banks typically require stricter documentation but may offer better rates. On the contrary, fintech lenders usually have flexible criteria but higher interest rates.

6. Lower debt: High debt-to-income (DTI) ratio can spoil your chances. So, one should aim for a loan to income ratio lower than 40 per cent.

7. Relationship with bank: Banks with which you already have a bank account may be more than willing to lend to you.