5 Points to Know When Applying For a Personal Loan as A Non Salried Individual
May 18, 2020
Well, the transition from being a salaried individual to becoming a self-employed individual is quite exciting. After all, you are finally your own boss and can explore your entrepreneurial skills further. But you need to remember this famous saying, “With great power comes greater responsibility.”
Now, that you do not have any fixed date on which the salary will be credited to your account, you need to be more resourceful with your finances. Emergency financial requirements are an inseparable part of a self-employed individual’s life; as such you may need alternate means of financing during uncalled for emergencies.
About Personal loan for self-employed
One of the easily accessible options is a Personal Loan for Self-Employed. Earlier Personal Loans were offered only to salaried individuals, but now various financial institutions have started offering Personal Loans for self-employed individuals as well. The features and properties are almost the same as a Personal Loan for salaried, but still, there are some inherent differences.
Here are the things you need to know while taking a Personal Loan as a self-employed individual-
Stricter eligibility criteria
One thing that you need to know about a Personal Loan for self-employed is that the lenders prescribe stricter eligibility criteria. As self-employed individuals do not have a fixed source of income (such as salary or commission), the risk involved for lenders is higher. Moreover, the cyclical fluctuations in a business or profession can lead to erratic cash flow. Therefore, financial institutions have more stringent eligibility criteria that the applicants need to follow.
Some of the major highlights of the Personal Loan Eligibility criteria for self-employed are:
- Need to have a credit score of 750 or more to be eligible.
- The business or practice must be at least 4-5 years old and working in an approved area.
- The business must be appropriately licensed and approved. In the case of a professional, the owner must have a valid license from a statutory authority.
- The business must be profit-making for the last 3 years, with the profits increasing every year.
- The debtor aging ratio must be within acceptable limits.
- Documentary evidence substantiating the financials of the business must be available.
Use your negotiation skills
When it comes to a Personal Loan for self-employed, the number of options available is quite limited. Many lenders offer Personal Loans for salaried individuals only, thus reducing the choice for you.
As a matter of fact, primarily only private-sector lenders offer Personal Loans for self-employed. Thus, finding the best deal for your Personal Loan requirements could be a little challenging. As the risk involved in the case of self-employed is higher for the lenders, so they tend to charge a higher rate of interest rate and processing charge.
Here are some tips to help you in your quest: –
- The number of options available might be less, but you still need to undertake research to identify the best Personal Loan lenders and get the best deals.
- Make sure that you pay attention not only to available Personal Loan interest rates but to the APR as well.
- If you have a good credit score, you can negotiate with the lender for a better deal as well.
- Add a co-applicant to improve your eligibility. You can also include your additional sources of income.
- If you have an existing relationship with the lender, you have better chances of being approved for the loan.
Higher interest rates
As the risk involved for the lenders is higher in the case of self-employed individuals, the Personal Loan Interest Rates charged are slightly higher than compared to personal loan for salaried individuals. You must, therefore, be careful before availing of this facility. To reduce your interest costs, you can use the following tips:
- Choose the shortest repayment tenor that your financials allow. Repaying the loan at the earliest is the best way to minimize the interest costs.
- Avail only that much amount that you require. Availing high-value amounts just because you are eligible for it will put an unnecessary burden on your financials.
- You can opt for a line of credit instead of a Term Loan if you do not need the money in one go. This will allow you to pay interest only on the amount utilized, instead of the entire loan. For instance, you can avail of a Flex Salary Personal Loan of up to Rs. 2 Lakhs as a line of credit directly through a mobile app.
- You can also opt for a Personal Loan Balance Transfer to access lower interest rates and extended repayment tenor.
Extensive documentation requirement
The documentation requirement for self-employed individuals is not as straightforward as that for salaried individuals. You need to provide several documents to complete the application process.
Here are some of the documents which you will need to provide:
- Business Registration Certificate.
- Professional License from statutory authorities.
- Bank statement for the current account for the last year.
- Bank statement for the savings accounts for the last six months.
- Proof of ownership of a property.
- KYC documents.
- GST/VAT returns for the last 2 years.
- Repayment track of other loans and credit facilities
- Net worth statement.
- Income Tax Return for the last 3 years with audited financials and annexures.
- Form 26 AS for the last 2 years.
- Lease deed for the office or factory premises.
Start preparing early
The processing time taken for a Personal Loan for Self-Employed applicants is longer as compared to that for salaried individuals. This is due to the additional stages of document verification and business references. It is therefore advisable that instead of waiting till the last minute, you start preparing your documents early.
Here are some tips to help you with the process:
- Keep your bank statement updated every month.
- File your Income Tax on time and get the documents attested from a CA.
- Maintain a file in which you keep all your documents. Keep multiple copies of the documents ready.
- If you prefer online applications, keep scanned copies of the documents ready.
- Maintain adequate balance in your accounts with no instances of cheque bouncing.
- Ensure that all the certificates and licenses are valid.
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