Personal Loan for Self Employed

Personal Loan for Self Employed

Self employed are individuals who are not salaried and earn their income by running their own incorporated business. Self Employed can be divided into 2 categories

• Self employed professionals: Banks categories doctors, dentists, surgeons practicing from own clinics chartered accountant, architects, consultants, interior designers as Self Employed Professionals (SEP)
• Self employed non professionals: These are business which are not categorised under self employed professionals and can be manufacturing, trading or services business enterprises.

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Personal loans which are offered without collateral are easy and instant loan for self employed in India to meet their short term urgent personal or business expenses requirements. For salaried individuals, personal loan are given based on their income, job stability, size and reputation of the company they work for, CIBIL score and other eligibility factors. It is easier for salaried to get approval on a loan application as they can provide income proofs in the form of salary slips, ITRs and Form 16 from their companies.

However, when it comes to self employed, banks have to rely on the income tax returns and audited financial statements of businesses which are prepared and submitted by self employed and businesses on their own. Hence, in many cases there is a risk that the revenues and profits may be under-reported in a bid to save tax or over-reported when the business is trying to get funds.

Personal Loan Eligibility for Self Employed

If you are a self employed and want to take a loan from bank for your business purposes, you will be required to meet the following eligibility criteria:

ITR – When you apply for personal loan as a self employed, it is mandatory to have filed ITR in previous years. Banks and NBFCs will give you loan if you have filed ITR of minimum 2 years. Some banks and finance companies may require you to submit ITRs of minimum 3 years. Your monthly income is evaluated on the basis of submitted ITRs which help in determining your repayment capacity.
Interest rate can be lower if you have submitted ITR as per bank's norms and have more chances to get loan.

Gross Annual Receipts - For self employed professionals, Gross Annual Receipts is the income earned without subtracting any cost or expenses during the annual accounting period. Most banks and NBFCs will give professional loan for doctors and other professionals with minimum GAR of Rs. 5 Lakh. However, check this carefully as few NBFCs and banks will approve an unsecured personal loan only to self employed with minimum Gross Annual Receipts of Rs. 10-15 lakh.

Work Experience – Years of Work experience is an important factor considered by banks and NBFCs to take a decision to give you approval on your loan application form. It gives the bank or NBFC an assurance that you can repay the loan on time. Banks typically give Professional loan for doctors, lawyers, CA, CS and architects with minimum work experience of 3 years. However, some banks and personal finance companies may insist on a vintage of 5 years as well.

Banking Stability – Banks and NBFCs will study your banking history based on information in your bank statements of minimum 6 months to approve your loan. Banks evaluate your average account balance to evaluate your banking stability and capacity to repay the loan. Banks will also evaluate your outbound and inbound cheque bounce information to ascertain your credit track record.

Credit History –Most banks will consider your credit score before taking a lending decision. In the case of self employed, the bank will check the CIBIL of an individual as well as that of his firm and in some cases, the CIBIL score of joint owners in the business. As a businessmen, a positive credit repayment track record and a good credit score will increase your chances of getting an easy loan from the bank.

Age – Banks will give you a loan if you have minimum age of 25 years and maximum upto 65 years at the time of loan maturity. However, some banks also give loans at the age of 23 years also.

Other Factors: While taking a decision to give a personal loan to self employed, the bank will also look at other properties owned by the borrower. For instance, a borrower living in his own residence or operating from an owned office will have a better chance of getting a loan approval. Banks also evaluate the past three years VAT returns to get a sense of the real turnover of the business and to ensure that timely tax has been paid to the government.

Personal Loans For Self Employed With Bad Credit Score

A self-employed may find it difficult to get a personal loan for professionals with a low credit score. Banks are not keen to offer an unsecured loan your loan if you have low CIBIL score as lenders perceive the risk of default as high in such cases. Hence, in cases of low credit score, borrowers have a higher chance of getting a secured loans such as mortgage loan or a gold loan.
Mortgage loans can be an attractive loan option for self-employed borrowers if they are looking for bad credit loans or low interest loans. Banks do a CIBIL score check for mortgage loans, but unlike a personal loan may sanction your loan with a lower credit score.
Gold Loans are the best loans for self-employed professionals with bad credit score as they are instant loans which can be availed with no financial documents and without a CIBIL check.
In addition to availing a mortgage loan or gold loans, you can also consider approaching NBFCs that are willing to extend credit to customers for slightly low credit scores subject to availability of collaterals, guarantees, past settlements. However, such loans are available at higher interest rates compared to other available loans in the market.

Personal Loan For Self Employed without Financial Documents

Similar to bad credit personal loan, it is difficult to get a personal loan for self employed with no proof of income such as three years ITRs or audited financial statements. You may be struggling to get a loan if you do not have complete financial documents or do not have a credit history. Bank finds it difficult to estimate your repayment capability and hence, may not sanction a loan to you.
In these cases also, availing a gold loan which does not require a CIBIL score or any financial documents may be one of the best available personal loan for self employed and professionals.

EMI Calculator: Personal Loan For Self Employed

EMI for personal loan for self employed works on the same factors as that of a salaried borrower -

• Loan amount – Higher the loan amount, higher is your loan EMI. Your loan amount eligibility will be a function of all factors related to turnover, growth, profitability, age, banking history and CIBIL score as discussed above.
• Interest rates – Lower interest rates reduce your amount of EMI whereas higher rates increases your EMI. Your interest rate will also be a function of an assessment of your risk profile by the bank. Higher the risk profile as per the credit assessment process of the bank, higher will be the interest rate.
• Loan tenure – Applying for a loan for short period can raise your EMI or vice – versa.

Here are few illustrations which will help you to understand how the above mentioned 3 factors can impact your EMI

Mr. A who is a doctor by profession wants to open a new clinic for which he needs Rs. 10 lakh. He has a business stability of 3 years, has regularly filed ITRs and has a current net income of Rs. 60,000 per month. He is eligible for a personal loan of Rs 10 lakh from Bank X for a tenure of 5 years and an interest rate of 14%. The doctor, Mr. A has to pay an EMI of Rs 23,268 for this loan.

Mr. B is an architect from Ahmedabad with experience of more than 5 years. He wants to open his firm in Gujarat. He is short of Rs. 10 lakh in total amount for which he takes personal loan from the bank after submitting all the essential documents (KYC, ITR of 3 years, bank statement of 12 month). He has Ggross Annual Receipt of Rs. 20 lakh. Hisank sacntions him a professional loans for 5 year repayment tenure at 15.60% interest rate. In this case, Mr. B has to pay an EMI of Rs. 24,106 per month.

Mr. C who is a CA by profession and have been setup his office in Delhi since 2010. Now, he wants to extend the same office as he is less of some space for which he needs a fund of Rs. 5 lakh. He gets loan at 14% rate for 3 years as he is earning Rs. 100,000 per month and can comfortably repay the loan in 3 years. The EMI he has to pay every month is Rs. 17,089.

The table given below gives the EMI record of all the 3 cases discussed to understand the impact of various loan terms such as loan amount, loan interest and loan tenure on monthly EMI.

Personal Loan Documents Required for Self Employed

• Signed application form
• Passport size photographs
• Income Tax PAN copy
• Identity proof – Passport/ Driving License/ Voter ID/ PAN
• Address proof – Registered rent agreement/ utility bills which are not more than 3 months old/ Passport
• Income proof – ITR of last 2 – 3 years and 6 months bank statement
• Business existence proof – Service tax registration/ VAT/ business address proof/incorporation details in case of companies/ partnership deed
• VAT Returns and GST registration number

FAQs on Self Employed Personal Loan