Carrying out your business is a proud thing to do since all the income generated goes to your account, and there are no pressures of getting to work on a scheduled time or following some set rules. But the disadvantage comes from loan acquisition.
As a gig worker, you may find it difficult to obtain a personal loan from a traditional lender. This is because most personal loans are based on your ability to repay the loan, and gig workers typically don’t have a fixed income. However, there are some lenders who offer personal loan for self-employed individuals. When applying for a personal loan as a gig worker, you’ll need to provide evidence of your income, such as tax returns or bank statements. You may also need to provide a business plan or proof of employment.
While it may be more difficult to obtain a personal loan as a gig worker, it’s still possible to get the financing you need. Keep on reading to know more.
Why Is It Hard For Self Employees to Get Loans Than Employed Individuals?
Most loans require proof of stable income, which can easily be shown from the employment pay stub. But what if you are self-employed? Self-employed individuals include gig workers and freelancers. That means you have a variable income making it hard for the lender to figure out your exact amount.
You’ll still need a loan sometimes, even if you are self-employed due to financial hardships. One report on the economic well-being of the US households in 2019, featuring supplemental from April 2020, found that only three-quarters of US adults were ‘doing okay’ (39%) or ‘living comfortably’ (36%). The rest of the adult population were either ‘just getting by’ (18%) or even ‘finding it difficult to get by’ (6%).
A recent study found that nearly 30% of American adults have done some form of gig work in the past year. This includes activities such as TaskRabbit, driving for Uber, or renting out a room on Airbnb. The study also found that gig work is not just limited to young adults – nearly 40% of those aged 45-54 have participated in gig work in the past year. With the rise of the sharing economy, it appears that more and more adults are participating in gig work. This trend is likely to continue in the future as adults look for ways to earn extra income.
Once in a while, you’ll find yourself in a ‘just getting by’ or ‘finding it hard to get by’ situation where you’ll need a loan. What will you do in this case?
How to get a loan if you are a gig worker or self-employed?
Create a Budget
Wait, how does a budget relate to getting a loan? The truth is that there is a close relationship between the two variables. When you create a budget, you’ll figure out the total amount you normally get per month and annually.
You will also know the amount to save and use in your expenses. Expenses include your taxes and other government expenses you need to pay. After figuring out these expenses, you can now know the real amount you earn, which will be used during the loan application.
Get a Tax Transcript
This is a record from the IRS that shows your past tax returns. You can request to get it from the IRS website through your mail or get it online. This document will be helpful when you are applying for a loan.
The lenders will know how much tax you are paying, making it easier to know how much income you get after tax. The taxes to be paid can include the social security tax, which comprises 12.9% of your self-employed income, and Medicare tax which comprise 2.99% of the income.
There are various tax transcripts you can request, which include:
- Tax Return Transcripts
This document shows most of the taxes that you originally filed, including Form 1040, 1040A, and 1040EZ. No changes will be recorded in this document when you file your returns.
- Tax Account Transcripts
This is where the changes made when you file your returns are recorded. The document also shows information like your gross income, taxable income, and personal info like marital status and age.
- Record of Account Transcript
This document combines the information provided in the Tax Account Transcript and Tax Return Transcript. It is much better and more convenient to request this file instead of requesting two separate files.
If you find it difficult to calculate the taxes, you can decide to get professional help. This will make it easier to get whatever loan you are applying for, including a loan for gig workers or a loan for the self-employed.
Use Your Good Credit Score
If you have been applying for a loan before when you were employed and managed to create a good credit score of 750 and above, it can simplify the process of getting a loan. This is because the score proves to the lender that you have a very good history of credit payments, and hence your loan can be approved. If you need this option to be successful, make sure you have acquired your bank statements and tax return transcripts, as mentioned above.
Secure the Loan Acquiring a Personal Loan for Self-Employed Individuals
It will be much easier to get loans for freelancers or loans for gig workers if you secure the loan with collateral. This will reduce the financial risks that can occur in case of default, increasing your chances of getting approved.
You can secure the loans with anything valuable, including jewelry, your car, your house, your business enterprise, or savings in the deposit account.
Use Your Former Lender
Do you have any lenders that you have been borrowing loans from in the past when you were employed? Why not use them? The records mean the lenders have built trust in you and are sure that you’ll repay the loan even if you are self-employed.
This option will, of course, be effective if you have a history of paying the loans on time.
Options to Take If You Have a Bad Credit
Using the above options won’t work if your credit score is poor. So, how will you get loans for freelancers if you have bad credit? Well, you can try the below options.
Get a Cosigner
A cosigner is someone who will be responsible for your loan payment in case you default. The cosigner should have a good history of credit payments hence a good credit score. The higher the score, the more the terms get better.
Of course, getting a cosigner will be difficult but not impossible if you have someone that truly trusts you.
Use Your Credit Cards
Credit cards are useful for making purchases. If the loan you need is to buy a piece of equipment or for bulk buying, it will be a good option to use the cards. You can also apply for the cash advance option if you need cash instead.
Get the Pawnshop Loans
Do you need loans for no job? This is the best option for that scenario as you don’t need proof of income to get the pawnshop or payday loan. You’ll, however, need to secure the loan with a valuable item. The interests accrued in this loan are pretty high. It’s advisable to be cautious with them.
Conclusion
Being self-employed doesn’t mean you can’t acquire credit. Just use the above option to get the financial help that you need.
