As a self-employed individual seeking a personal loan, you’re required to meet certain eligibility parameters spelled out by lenders. Most Fintech lenders operating in the unsecured loan space offer personal loans to salaried individuals, but there are several banks, private lenders, and a few Fintech lending companies that offer personal loans to self-employed individuals. If you are a self-employed individual looking for a personal loan, here are 4 important things to keep in mind while taking one.
1. You need to have a regular source of income: An important requirement that lenders look at is a stable source of income every month. An individual’s repayment capacity is determined by his/her income along with a few other parameters. If you are a self-employed individual and need a personal loan, you’ll be required to share your bank statement for the last 6 months at least (minimum is 6 months, some lenders may ask for 12 months). Even your sanctioned loan amount will be determined by your income level, so make sure you have a stable source of income every month if you want to qualify for a personal loan as a self-employed individual. Also, some lenders evaluate the stability of your business, and require that you be associated with your current business for at least 2 years in order to become eligible.
2. Your credit score is still a crucial eligibility determinant: Many a time, self-employed individuals, especially those running a business, have higher income levels than salaried individuals. While the income quotient is an important aspect that contributes to loan approval, just because some self-employed individuals may have comparatively higher income levels, the credit score is still a very important eligibility determinant. This implies that just like how salaried individuals are required to satisfy a minimum credit score requirement, self-employed individuals are required to as well. The minimum credit score that top private banks require from applicants is in the range between 700 and 750. Fintech lenders, however, entertain applicants with credit scores of 575+ as well.
3. Your repayment history and number of credit accounts are major influencers too: Your repayment history is a record of all repayments you’ve made towards existing and past credit accounts that you’ve availed. This means that consistent timely repayments will boost your credit score significantly over time, while instances of late payments and defaults negatively impact your credit score. Note that lenders use a certain model known as the risk-based pricing model to determine the cost of borrowing (interest rate) for loan applicants. Under the risk-based pricing model, lenders will calculate the probability of a customer defaulting on an availed credit product – higher the probability of default, higher the interest rate offered to the applicant. As the repayment history and number of credit accounts individually impact an individual’s credit score, they also consequently influence the probability of approval or rejection. So if you wish to keep your approval chances high, make sure your repayment history is clean, with no instances of defaults and minimal late payments.
4. Age: You should be at least 21 years old in order to qualify for a personal loan as a self-employed individual. Some lenders expect potential consumers to be at least 23 years old – the age criterion differs from lender to lender.
[This is an authored article by Aditya Kumar, Founder & CEO of Qbera. All views, opinions and expressions are personal and limited to the author.]