Taking out a small personal loan eases your financial burden by spreading the cost over a fixed, affordable monthly instalment so that you can concentrate on the moment rather than on the cost.

When you borrow a small personal loan, lenders assess your application based on a few key metrics – your credit score, income stability, and employment status. A credit score is the creditor’s window into your past financial behavior, allowing them to evaluate your repayment ability.

Once you qualify for a hard credit inquiry and your loan gets approved, the lender will transfer the amount right into your bank account within a few days. The funds are then at your discretion, but it is crucial to use them responsibly.

Missing repayments on your small personal loan could be detrimental to your credit score. Plus, a default may result in a County Court Judgment (CCJ) from the lender. A CCJ stays on your credit file for about six years, impeding your chances of securing low-interest credit in the future.

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It is crucial to choose your loan options carefully when you’re self-employed, keeping your repayment ability in mind. Considering your short and long term financial circumstances, here are some secured and unsecured loan options that you can choose from:

• Personal loans: An unsecured personal loan can help you break down the cost of your purchase over months in fixed, affordable monthly instalments without securing collateral. Personal loans enable you to borrow from £1,000 – £35,000 over 12-84 months. Some lenders may lend you higher amounts if you apply with a stellar credit report. To get competitive interest rates on unsecured personal loans, you will need a strong credit file, income proof, and employment stability. While you may be able to avail of credit with a below-par credit score, the loan you borrow might come with a high-interest rate.
• Secured loans are suitable for borrowers who can put up assets as collateral. Home equity or property are the most common assets used as collateral. Now, suppose you fail to keep up with repayments. In that case, the lender may recover the money by repossessing and selling your property. Suppose you do not have a substantial employment history, documented income, or solid credit history. In that case, you might want to explore this option. Loans secured by collateral have lower interest rates than other credit products. Still, they pose a high risk to the borrower. Consider your options carefully before making your decision. 
• Guarantor loans: A lender may require you to provide a guarantor if you have a below-average credit score. You can use guarantors if you have close friends or family members willing to help you meet your loan obligations – if you default on your loan repayments, the responsibility for paying the loan falls to your guarantor. To minimise the risk of default, lenders prefer guarantors who have a strong credit history and regular income. With a guarantor on your side, you have a better chance of being approved for a loan if you’re sure of your ability to repay the loan. Additionally, your guarantor should be fully aware of the risks associated with guarantor loans.
• Business loans: Finance your urgent business expenses or stabilise your company’s financial health with a business loan. Lenders typically require you to provide details about your business accounts to qualify for a business loan. 

Long-term self-employed loans are essentially unsecured personal loans that you can borrow over a longer-term, usually above three years. Long-term loans tend to have smaller monthly instalments. However, since the loan term is long, you may end up accruing interest for a more extended period, increasing the overall cost of your loan. You may opt for a long-term loan if you’re looking for more affordable and flexible repayments. 

When you apply for a long-term loan, lenders assess your credit score and financial circumstances through a hard credit check. Credit scores give lenders an insight into your repayment ability, allowing them to evaluate their risk proposition. So, the higher your credit score, the lower will be the lender’s risk proposition, and resultantly, the lower will be the interest on your loan. Once you qualify the hard credit check and complete the contractual formalities, the lender will transfer the money directly into your bank account. You can then use the funds at your discretion, albeit responsibly. 

Long-term self-employed loans have severe repayment implications – a missed repayment could cost you up to 150 points off your credit score. If you miss payments consistently and default on the loan, the lender may get a County Court Judgment (CCJ) issued to you. A CCJ stays on your credit report for up to 6 years, impeding your chances of getting credit for your future goals. As long as you repay the loan responsibly, a long-term self-employed loan can help you boost your credit.

• Identity proof: Driver’s licenses and passports are accepted as forms of identification. 

• Residence proof: You can use your utility bill or council tax receipt as proof of residence.

• Bank statement: Lenders use bank statements to verify earnings in your SA302 statement. 

• Bank statements also give a general insight into your financial standing over some time.
• Tax Returns (SA302): You likely file your tax returns yourself if you’re self-employed. You can download your SA301 from the HMRC website. The SA302 is widely accepted as proof of income for self-employed people.
• Proof of rental income (if any): You must declare any rental income you receive from a property. Bank statements, a signed lease, and mortgage documents can come in handy to prove tenancy.
• Details about your business: A lender will want to know about your company’s nature and status. Include any financial interest that someone has in the business if they are co-owners. 

Depending on your requirements, you can typically borrow a long-term self-employed loan for 3-7 years. Suppose you apply with a stellar credit profile, reasonable business history and stable cash flow. In that case, some lenders may even lend you a sizeable loan amount for up to 10 years.

Here’s what you can use a long-term self-employed loan for:

• Use it as working capital
• To pay for stock and equipment
• Cover website maintenance and marketing costs
• Fuel business growth
• To fulfil a contract
• Pay for a one-off cost

A self-employed loan can give your business a considerable boost to success. Still, you need to weigh the pros and cons before borrowing a loan carefully. Consider the following factors before taking out a loan:

Is this an appropriate loan amount for me? 

You must determine your ability to repay the loan before applying. Identify a suitable loan amount and avoid borrowing more than you can afford to repay.

Will I be able to commit to the loan term? 

Loans over a long period require more outstanding commitment. While long-term loans may have lower monthly payments, they may have a higher interest rate overall. Thus, you must evaluate your financial circumstances carefully to figure out the correct loan term.

What happens if I miss a repayment?

Failing to make a timely repayment can lower your credit score. By missing several payments, you run the risk of suffering a default, which could result in a County Court Judgment (CCJ) that may further tarnish your credit score. Thus, it is vital to keep up with your repayments on time to maintain your credit.

Do I need a contingency plan?

You can stay on track with your repayments more efficiently if you have a contingency plan in place in case of an emergency.