Self-Employed Bad Credit Loans

Updated: May 15, 2024 Author: Paul Gillooly

Key Takeaways: Being approved for self-employed bad credit loans is challenging as there’s reduced borrowing options. Lenders will see you as a higher risk and to balance their exposure they charge higher interest. In light of the narrowed pool of lenders, avoid anywhere advertising ‘guaranteed’ loans as FCA authorised lenders must conduct an affordability assessment. Being self-employed does not limit your borrowing options. Being unable to afford the repayments will. Never borrow beyond your means!

How to easily get a self-employed bad credit loan?

While many see self-employment as a liberating experience in which you are your own boss, a lender will typically see someone who is a higher risk because of the lack of guaranteed income. Even without bad credit, a self-employed applicant can find it harder to have any finance approved because if circumstances change and you can’t work, you don’t have security like Statutory Sick Pay to tide you by until you’re fit to return to work.

If you have bad credit and are self-employed, the situation can feel rather daunting and like you have no one on your side. The key thing to remember here is that just because a loan is easy to qualify for and quickly pays into your account, it doesn’t mean it is the right solution. 

A quick search for “easy bad credit loans” will return dozens of offers from lenders who offer loans that they say are guaranteed. The problem is that to guarantee the loan goes through, they’re ignoring their FCA obligations, which is to conduct an affordability or creditworthiness assessment.

While this may sound like nothing more than red tape designed to get in the way and slow you down, it’s there to ensure the loan is affordable. If your financial situation deteriorates the moment the first monthly repayment is due, you’ll be in a worse situation than you were before you took out the loan. Avoid guaranteed loans at all costs, even if they seem like the easiest way to get a loan with bad credit when self-employed. 

How do you prove self-employed income with bad credit?

Just as proving your credit score requires you to supply some simple information, proving your self-employed income is often just a case of supplying two years of tax returns. If you have been working for yourself for less than two years, or if your current set of accounts are outstanding, many lenders will make allowances for this. However, they are likely to make fewer allowances the lower your credit score is. 

Here are a few things to remember when making your case: 

• Lenders are not trying to turn you down — they want to lend so they can charge interest — they are weighing up the risk they’re exposed to 
• An up-to-date tax return is your equivalent of the last three months of payslips that someone who is in a salaried position will have to supply. Lenders ask for longer payment history from the self-employed as evidence the income is reliable and not from a short-term contract, or a peak in earnings from a seasonal business that’s likely to have lower income at different points of the year.
• As someone who is self-employed, there is a possibility that you have business assets that could be used as security. As an example, self-employed delivery drivers could secure a V5 loan on their van.

Determining if you can secure a loan against your business assets is a matter of deciding if the loan is for personal or business use. If in doubt, speaking to a financial advisor would allow you to make a clear decision that protects your business and your personal finances by keeping the two of them separate and well-organised. 

How to get an affordable bad credit loan when self-employed?

If you have assets, securing the loan against them (provided you can meet the repayments) will reduce the interest you’re charged. This is because the lender will know that if you default on the loan repayment schedule, they can take your asset to cover their losses. 

A similar approach involves having a guarantor as part of your application. This is someone (typically a close friend or relative) who will agree to make the loan repayments in the event that you can’t. If you default on a payment, the guarantor automatically becomes liable for the remainder of what you owe. If you have someone you can trust and rely on, and who knows you well, then asking them to be a co-signer on a guarantor loan can make your bad credit loan more affordable. 

Do direct lender loans work for the self-employed?

The idea with a direct lender is that you get a quicker, more affordable loan because there’s no middleman. By cutting out the person in the middle and talking directly with the lender, you should be able to open up a wider range of options when you have bad credit. There is, however, one really important thing to note. 

If you see promises of guaranteed approval, or language that in any way implies it without explicitly saying it…avoid! No lender that is following their FCA obligations can guarantee that a loan will be approved, which means lenders who make this promise are letting you down. You might think they are doing you a favour by removing the bureaucracy, but what they’re actually doing is trying to turn a quick profit by using your stressful situation to their advantage. 

What should a self-employed person with bad credit do?

Take a moment, think clearly, avoid rash decisions, and take a look at the following key points so you can keep perspective: 

• Any lender who ‘promises’ to give you a loan is trying to profit at your expense. They should be checking you can afford to repay them without experiencing financial hardship
• More affordable interest rates (even with bad credit) can be obtained through secured loans or by asking someone you trust to act as a guarantor
• And remember, being self-employed, you have the ability to scale up your income in a way that isn’t necessarily open to someone on a fixed salary – if you’re seasonal and can prove with a couple of years trading history that your revenue is due to pick up, lenders may be able to factor that into their decision to approve or not. Particularly if it’s a small short-term loan, such as under 6 months.

The pressure of stretched finances and bad credit can cause a large amount of stress at home in your personal life. There is no shame in reaching out and asking for help, but it’s essential that you’re aware of dishonest lenders. Finding a solution that will allow you to make the repayments and get back on your feet is the key thing to remember here.