One of the most fundamental details that all banks will look for in all loan applicants is a steady, dependable income. The amount of this income will decide how much the applicant will be granted. If there were no dependable income, then on the face of it, it would appear to a lender’s calculation, that the loan amount should be zero. This is the traditional method of calculating personal loans.
Self Employed Business Loans
Business loans are calculated on a different basis. They do not need to show guaranteed income. In fact to do so would be impossible for most business. So banks came up with an alternative way of calculating business credit worthiness. This involved assessing past earnings, assets, debt and liabilities. A similar model is now in place for self-employed loan applicants. Instead of showing them evidence of your salary, you can instead show the bank what business you’re in, how much you’ve been earning and for how long, how the business is likely to continue and current debts and liabilities. All of this information will then go into assessing your income, your risk, and how much you can afford to borrow.
Difficulties Being Self Employed
There are still some difficulties involved in borrowing for the unemployed. For example, if you haven’t been in business for very long, it will again become difficult for lenders to assess your level of risk. Usually they can get a pretty accurate picture of what your earnings are going to be by looking at the amounts of previous years. If the income has been steadily increasing or decreasing, they may wish to take this trend into account but basically, they will be assuming that you continue on as you have been trading thus far. This becomes impossible if your business is very new. There will be no trading record or past earnings to rely on.
Another difficulty that you will face is that many lenders may still treat the self-employed as a greater risk than traditionally employed. It is a simple fact that new business fail more often than more established businesses. They also fail more often then lay-offs occur. So the risk may still be treated as greater and this will be indicated in the terms and interest rates you receive.
The Future
All this seems to be changing as employed people switch from job to job more frequently than before. This makes them less reliable, and the self employed are gaining a reputation as good borrowers, the rates you receive should begin to get closer and closer to those of salaried applicants.
Joseph Kenny is the webmaster of the loan information sites http://www.selectloans.co.uk/ and also http://www.ukpersonalloanstore.co.uk. At the Personal Loan Store you can find some of the latest personal loans explained in detail.