Looking to get a loan fast but unsure when your next paycheck is coming in?
As more Britons explore alternative career paths, self-employment is on the rise. In 2024, 13.1% of the UK workforce were self-employed and working as freelancers, consultants, or small business owners. While this shift is both aspirational and empowering, it comes with one major drawback – income uncertainty.
Take freelancers, for example; who might earn over £2,000 one month and then face a three-month dry spell. Small business owners often experience similar fluctuations, with income varying drastically from month to month.
With smart budgeting and disciplined investing, it’s possible to build a sustainable life around self-employment. But when an unexpected financial emergency hits, things get tricky. Despite having a solid credit score and a correctly completed loan application, your irregular income could still lead to rejection.
So, what borrowing options are actually available to those who are self-employed?
Why do Banks Avoid lending to People With Uncertain Income?
Banks are averse to risk and only lend money to people who appear low-risk in their eyes. They have stringent criteria in place to ensure this. A common reason for loan rejection is uncertain income.
Freelancers, seasonal workers and entrepreneurs often have irregular monthly income. This makes it difficult for lenders to assess whether you can make regular payments. Salaried employees have regular cash flow, making them low-risk borrowers.
Another challenge for financial institutions is verifying total income. Employees can easily provide proof through bank statements and payslips. However, self-employed individuals rely on invoices and tax returns, which can be harder for lenders to interpret and less reliable as proof of steady income.
This income unpredictability increases the perceived risk of default, making traditional lenders more hesitant to approve loan applications from the self-employed.
4 Best Loan Options for People With Irregular Income
Here are the following loan options that are available for you:
- Secured loans: You put up collateral such as a car or home. This allows you to borrow at a lower rate even with a variable income.
- Guarantor Loan: People who have someone who can vouch for them can apply for this type of loan. The guarantor needs to have a steady income and a good credit score.
- Payday Loans: These loans usually come with fewer eligibility checks. Approvals are easy and can come in handy when you need immediate cash despite having a poor credit score.
- Peer-to-Peer Lending: These are more non-traditional lending options, with higher interest rates but flexible eligibility criteria.
4 Steps to Get a Loan With Variable Income
1. Improve Your Credit Score
When you have a good credit score, lenders are more likely to approve your loan application despite not having a regular income source. Credit scores can be improved by paying off previous debts on time or having a credit builder credit card. Additionally, you can avoid taking out loans too often and maintain your credit utilisation below 30%.
2. Have A Collateral
To reduce the lender’s risk, you can borrow by pledging collateral, also known as a secured loan. For example, if you are a small business owner looking to buy a home, you can put down a deposit of 25-30%. This helps the bank trust your ability to repay the mortgage. When applying for a personal loan, getting a secured loan increases your chances of approval.
3. Pay Off Existing Debt
Lenders consider the debt-to-income ratio when approving your loan application. If all your earnings are going towards paying off existing debts, they might be wary of sanctioning a new loan. The less you borrow, the more likely you are to get your loan approved.
Someone who is drowning in debt is a high-risk borrower. The lower your debt-to-income ratio, the higher your chances of approval.
4. Build a Strong Financial Portfolio
Despite uncertain income, with proper planning and knowledge, you can create a strong financial portfolio. Begin by keeping a detailed record of your income, which includes invoices and bank statements. Next, file your tax return to HMRC on time and keep the tax returns handy. Follow this up with enough cash in your savings and a long-term bank account. You can also support this by maintaining a diverse, low-risk investment portfolio.
Financial institutions are more likely to offer you a line of credit if you can demonstrate to them that you manage your money well.
In Conclusion
Borrowing can be a difficult endeavour, especially if you are someone who doesn’t hold a traditional, salaried position. However, many online lenders are more lenient and flexible with their approval process, making borrowing easier.
Money management is extremely important for self-employed individuals, such as following the 50-30-20 budgeting process, saving for an emergency fund and having a diverse investment portfolio.
It’s also important to have a side hustle to supplement your income, especially at a time when inflation has skyrocketed. Using debt wisely can help you avert a financial crisis.