About 50% of Indians are self-employed. Since lenders do not like being involved with risks, it can be challenging to get a personal loan self-employed because the income of self-employed people fluctuates. So, there is no certainty that the borrower will pay.
Despite that, many lenders offer loans for the self-employed. As long as you qualify and are eligible, you can avail a loan with ease.
Personal loans for the self-employed have pros and cons you should know. Check them below!
Pros of personal loans for self-employed individuals
Below are the benefits of loans for self-employed people. They help in various scenarios, including:
1. It helps small and medium businesses grow fast
Growing a business is not a walk in the park, and one needs to make strategic plans. The amount of money you have will play a major role in thriving your business. Insufficient funds can’t make a business succeed. Individuals operating small and medium businesses often are in stiff competition with existing and established businesses. Taking out a personal loan will help boost any financial constraints you have in your firm.
2. Do not require collateral
Unsecured loans are also known as collateral free loans, it means you do not require any collateral for these loans. Collaterals are assets provided to act as security in case of default payment. Most lenders will first look at your ability to repay before approving your loans. If your credit record is good, no collateral will be required.
3. Fixed interest rates
Any time you apply for a loan, checking the interest rate is one of the things you do. The lower the rate, the better. Borrowers will prefer the loan with a lower interest rate because a higher rate makes the loan expensive, thus making the repayment amount more.
Compared to other types of loans, personal loans for self-employed have a fixed interest rate. This means your monthly installment is fixed. Some lenders may use reducing balances to charge interest rates, which may increase or decrease throughout the loan period.
4. You can choose your lender
When taking out a personal loan for a self-employed, you have many lenders to choose from. The borrower can choose a lender after comparing their services and loan offer.
5. It is a better alternative to business loans
Instead of taking a business loan, you can take a personal loan for the self-employed and use it for your business needs. The process of acquiring a traditional business loan can be tiresome and complicated. It requires a lot of formalities and documents that can make the whole process stressful.
Most business individuals prefer taking personal loans for self-employed because it is easier to acquire. Such loans are perfect for small and medium enterprises.
6. It has an easy and simple application process
Compared to other business loans, personal loan for self-employed is easy to apply for and require fewer formalities. It has flexible terms that allow anyone to apply.
Cons of personal loan for a self-employed
1. It has a fixed payment schedule
Most lenders have a debt repayment schedule that is not flexible and should be followed strictly. Failure to do that, your score could be affected. Before you take a personal loan for your business, ensure you have a repayment plan. Some lenders also charge some fees if you pay the loan before the loan period. Also, ensure you read the lender’s manual well.
2. Not suitable for starting up a business
A new business is considered a risk because you are testing its viability. Due to the uncertainty of such a business, it could be risky to take out a loan for that purpose. Unless you have done thorough research, be sure it will thrive and help repay the loan amount.
3. It may hurt your credit score
Loans can, at times, harm your credit score, whether you follow your repayment schedules or not. For example, let’s say you have taken a personal loan for your business, then suddenly you get an emergency that requires urgent cash, and you will have to take another loan. Your existing loan will lower your credit score. Also, if you take a loan to start a business and it fails, repaying it may be difficult.
4. Can be expensive
The fixed monthly installment may be expensive if you fail to repay on time. There are some charges imposed on overdue payments, which makes the loan expensive.
5. It could get you in a debt trap
Personal loans for the self-employed can be risky if you are taking them to start a new business. The future of the new business is undetermined. If the business fails and it turns out it was the only source of income you were depending on to repay the loan, you might end up in debt.
Most people desire to be self-employed and be their own boss at one point in life. This desire has led to increased demand for personal loan for self-employed. These loans have now become a solution for many businesses, and many have succeeded through these loans. However, before taking a personal loan, it is also very crucial to do research to determine the future of your business. This will help you overcome unnecessary future losses.