Loans

Payday Loans for the Self Employed

For many people, being their own boss is a dream come true. And in the rapidly expanding “gig economy,” many people are taking the opportunity to become self-employed. Read on to learn more about payday loans for the self-employed!

According to the recent statistics from the U.S. Bureau of Labor Statistics, over 9.5 million people are self-employed. As small business owners, entrepreneurs, and independent contractors, these people use their skills and expertise across every industry. 

The freedom of self-employment can come with some setbacks. Aside from the stress and headaches that come with running your own business, money troubles can send self-employed people searching for quick cash loans that can help them recover from a revenue loss.

Payday Loans Today

This reality is especially prevalent in today’s economy. As the effects of a global pandemic have altered the way we work, live, and make money. In times like these, it’s no wonder that the number of self-employed people who need the financial relief that can come from a personal loan is on the rise. 

One of the fastest, hassle-free ways to get money comes from payday loans online. However, payday loans for self-employed people can be hard to come by. Payday loans can call for records like pay stubs and W2’s because they can easily prove employment. There are better choices if you need money quickly.

Although traditional payday loans for self-employed workers aren’t an option, there is assistance available. In this blog, we’ll discuss the documents needed and the resources available to provide loans for self-employed people. 

What Are Payday Loans? 

Payday loans are short-term loans that are ideal for short-term problems. They are designed to fill the gaps between paydays. This way, a borrower can get the money they need now instead of on their payday.

To get a payday loan, a borrower fills out an application with a payday loan company. If approved, the borrower will write a check for the amount of money they want to borrow, plus the lender’s fees and interest. 

The lender then gives you money and cashes your check at the end of the loan term (about 14 days). Payday loans are available at thousands of brick-and-mortar locations across the country. As well as many online lenders that are just a click away.  

An online loan for bad credit is a good option for individuals that can’t get loans from banks. Bad credit is considered a FICO score of 600 or lower. With about 20 percent of Americans living with bad credit, it’s easy to see why payday loans are popular.  

With this kind of rapid processing and approval, payday lenders must be able to assess your creditworthiness. This can make it difficult to approve self-employed people who don’t have proof of income or a credit history. Without fast income verification, payday lenders can’t trust that the self-employed borrower can make enough money to repay the principal and interest owed.

So, if traditional payday loans for self-employed people aren’t an option, where can they find financial assistance?

What Do Self-Employed People Need To Get a Loan? 

To get a loan, a borrowers’ financial health is reviewed by the potential lender. To assess creditworthiness, the lender looks at income, credit scores, and several other factors. Without W2s and pay stubs to prove steady income, these borrowers must have a host of other documents available.

Tax Returns and Transcripts

Above all the other acceptable documents to prove income, tax returns are the most requested by lenders for applications from the self-employed. At a glance, tax returns can quickly provide detailed information about your income over some time. For most applications, lenders will ask to see two or three years’ worth of signed returns.

Tax returns are ideal documents to submit to lenders if you, as a self-employed individual, have a terrible or not-so-great credit score. While a low credit score can diminish loan approval chances, solid proof of your income can help turn the tide on a denial. In the end, lenders want their money back with interest paid, and proving you can do that will go a long way towards a loan approval.  

Schedule C Document

In addition to your tax returns, lenders may also ask to see your most recent Schedule C document. For people who do business as a sole proprietor or single-member LLCs, the Schedule C document details the profits, expenses, and losses of your business—which, under these circumstances, is just you.

Since most or all of the profits and income from your business are reported on your return, the Schedule C essentially confirms the facts about the money you make.  

1099-MISC Form 

For those that are self-employed as independent contractors, another critical document to have ready is the 1099-MISC form. The 1099-MISC form is used to report any income over $600 received from a client or business for your professional services. This form is used by lenders—in conjunction with documents like your tax returns—to ensure that your income as a self-employed borrower is steady enough to manage the terms of any loan. 

Schedule SE Form 

A Schedule SE Form is used to show the amount of taxes paid on your income, as well as the taxes owed towards Medicare and Social Security. Any suitable lender will want to know that your tax payments are current and without any discrepancies. Errors in your expenses may trigger the Internal Revenue Service (IRS) to perform an audit of your assets and liabilities. That kind of risk would be a bad investment for the lender. 

Bank Statements 

A self-employed borrower should have many weeks’ (or even a year’s) worth of bank records available. These statements will show a history of regular deposits from your work and show potent lenders that you have a steady stream of income that can support loan repayments. 

Loan Collateral

Loans are available in two forms: unsecured and secured. An unsecured loan is given based on the creditworthiness of the borrower and is backed by nothing. On the other hand, a secured loan is a loan like a car note or a mortgage; it’s backed by real property that has value. That property is called collateral.  

For people with a bad credit score that can’t get an unsecured loan, it may be possible to get a secured loan by “putting up” a house, car, or financial asset like a savings account. Collateral lessens the risk for the lender, which in turn will increase your chances for approval. However, if you fail to complete the monthly payments—or default—on a secured loan, the lender can take possession of your assets to make themselves whole.  

Other Loans for the Self-Employed

With bad credit, payday or personal loans for self-employed workers can be even more difficult. It’s no secret that bad credit can limit options for lower interest rates and long-term installment plans for repayment —two conditions that can make a loan manageable. If you’re self-employed and can’t get a loan, here are some options that you may want to consider: 

Credit Card Cash Advance 

Cash advances are essentially short-term loans funded by the line of credit associated with your credit card. Getting a cash advance is as simple as withdrawing cash from any ATM in the world, which makes these types of loans even more convenient than a payday loan. 

We’re listing this one with great caution because cash advances on credit cards can come with many expensive strings attached. Not only do these cash payouts come with very high interest rates (paid on top of your card’s APR), but they can also have additional processing fees attached depending on the ATM or bank you choose to withdraw from. 

If you have bad credit, this option may only be available to people that already have a credit card, as opening a new card may be difficult. If you choose this route, know that without having a well-considered repayment plan in place, this move can only make your bad credit worse. Be careful. 

Home Equity Loans and HELOCs 

If you are a homeowner who needs fast cash, you may be sitting (or living) in the answer to your short-term financial need. It may be possible to borrow money based on the current equity on your home through a home equity loan or a home equity line of credit (HELOC)

Your home’s equity is the difference between the money you owe on your mortgage and the current value of your home. For example, let’s say you bought your home with a $200,000 mortgage loan. After a few years, the home’s value rises to $280,000. That means that you have $80,000 in equity on your home since you now own a property that is worth more than you paid for it. Thank your realtor today!  

How Do They Work?

A home equity loan is a loan that is backed by the property itself. Because they are secured loans, they can be offered at lower interest rates than many other loan options. Once approved, home equity loans are typically disbursed and deposited into a borrower’s account within a week. 

Repayment is made through an installment plan that will run concurrently with any payments you are still driving on the mortgage. This is why home equity loans are also known as “second mortgages.”  

While a home equity loan is a lump sum, a line of credit allows for a revolving amount of money. So, that same $80,000 in equity would be the total amount of money available to borrow.

In that way, a HELOC is the same type of spending power you would get with a credit card. That means that if you only use $40,000 of your available equity, you won’t have to return the total of $80,000. 

The loan options available through your home equity can come at either a fixed (home equity loan) or variable interest rate (HELOCs).

Ultimately, the choice will depend on your financial need and preference for repayment. But whatever choice you make, it is essential to make sure that you understand the actual value of your home. So research the real estate market in your area to see how homes like yours are selling. And if you can, get a professional appraisal.  

The Bottom Line…

Loans for the self-employed can be hard to come by. But, with thorough research and decision-making, those in business for themselves can find their way out of financial trouble. 

References:

10 facts about American workers

How Many Americans Are Self-Employed in 2021? [Jun ’21 Upd]

Table A-9. Selected employment indicators

IRS Forms & Instructions

Average Us FICO Score Ticks Up To 706