How to Get a Secured Loan if you’re Self Employed

What Exactly is a Secured Loan for a Self-Employed Individual?

A secured loan is essentially a credit line backed by an asset, usually property, that you own. Every month, you repay a portion of this loan plus interest. When comparing secured and unsecured loans, consider the following key points:

• You put an asset, like your house, up as collateral when going for a secured loan.
• Secured loans generally offer higher borrowing limits than unsecured loans, often surpassing £25,000.
• Interest rates are usually lower for secured loans.
• If you’re self-employed, getting a secured loan can often be easier for you.

As a self-employed individual, you might be viewed as a financial risk due to fluctuating income. However, secured loans shift this risk onto you, since an asset you value is on the line.

How Do Secured Loans Function for the Self-Employed?

Much like any credit facility, secured loans come with the obligation of monthly repayments that whittle down the principal sum and the interest. Here’s how it works:

• An evaluation of your asset’s value is done prior to finalizing the loan.
• The loan amount you qualify for hinges on this assessed value and any existing debts against it.

Failure to meet your repayment commitments could jeopardize your assets. For example, if it’s your home you’ve leveraged, missing payments could land you in court and eventually force the sale of your property to settle your debts.

So, if you’re self-employed, weigh the pros and cons diligently. Ensure that your business revenue stream is solid enough to manage the loan repayments without destabilizing your financial standing

Who Qualifies for a Self-Employed Secured Loan?

If you’ve been self-employed for at least six months, you’ve made a good start toward becoming eligible for a secured loan. That said, some lenders may hesitate if you haven’t been self-employed for at least two to three years. But time in business isn’t the only factor that matters.

Lenders have specific criteria for approving self-employed loans. Generally, they’ll assess:

• Your personal credit score
• Your business’s financial stability
• Monthly earnings and expenses, to understand your business’s cash flow
• The value of assets you’re willing to use as collateral, especially for secured loans

Consulting with an FCA-approved broker can boost your chances of loan approval. Being well-prepared with this information will make the application process smoother.

What Can You Use a Self-Employed Loan For?

Self-employed loans are pretty versatile. You can use them for a wide array of needs, including:

• Investing in business stock, gadgets, or a work vehicle.
• Renovating your home, whether it’s a new kitchen or adding an extra room.
• Buying a new car or bike.
• Funding your dream wedding.
• Taking the family on a much-needed vacation.
• Consolidating multiple debts into one payment.

How Much Can You Borrow?

Your borrowing capacity is often linked to the equity you can offer as collateral. Most lenders let you borrow at least 80% of your total equity, though some may go as high as 95%. 

If you’re using a property for buy-to-let purposes, the maximum Loan-to-Value (LTV) might be a bit lower.

If you’re considering a secured loan, try the calculator below to get an idea of what your monthly repayments might be. 

[Embedded Homeowners Loans Calculator]

Keep in mind, that these numbers are just a starting point. For a complete financial picture, including any hidden fees or costs, chat with a loan advisor. They can help you make a savvy choice that fits neatly with your financial plans and situation.

Should You Get a Secured Loan if You’re Self-Employed?

Getting a loan can be tricky for self-employed individuals, but secured loans can be a good option. Here’s what you need to know about the pros and cons before making a decision:

Pros

• Lower interest rates. Secured loans typically have lower interest rates than unsecured loans, which can save you money over the long term.
• Higher loan amounts. Because you’re putting up collateral, lenders may be willing to give you a larger loan amount.
• Longer repayment terms. Secured loans often have longer repayment terms, which can lower your monthly payments.
• Credit flexibility. Even if you have bad credit, you may be approved for a secured loan if you have good collateral.
• Tax benefits. If you use the loan for business purposes, you may be able to deduct the interest payments on your taxes.

Cons

• Risk of asset loss. If you default on the loan, the lender can seize your collateral.
• Application complexity. Secured loans often have a more complex application process, which may include property appraisals and additional documentation.
• Additional costs. You may have to pay for appraisals, legal fees, and other charges.
• Limited flexibility. Secured loans may have stricter terms, which can make it difficult to manage repayments if your self-employed income fluctuates.
• Potential for debt spiral. Because it’s easy to get a large secured loan, you may be tempted to borrow more than you can afford, which could lead to a debt spiral.

Additional tips

• Only borrow what you need, and make sure you can afford the monthly payments.
• Compare offers from multiple lenders to get the best interest rate and terms.
• Read the loan agreement carefully before signing it, and make sure you understand all of the terms and conditions.
• Keep up with your loan payments on time to avoid defaulting.

What Interest Rates Can You Expect?

You’re likely to find better interest rates with secured loans compared to their unsecured counterparts. The rate offered to you will hinge on your specific financial situation and prevailing economic indicators like the Bank of England base rate. 

At the moment, the average interest rate for a self-employed secured loan hovers around 7% annually.

Are There Additional Costs to Keep in Mind?

Beyond the interest rates, there are other costs you’ll need to factor in:

• Initial setup fees from your lender.
• Professional costs like property valuations.
• Brokerage fees, which could either be a flat rate or a percentage of the loan amount.

Remember, these costs will inflate the total amount you’ll eventually need to repay.

What About Early Repayment Charges?

Should your business boom and you find yourself in a position to repay the loan early, be wary of early exit fees. These are charges you’ll incur for settling the loan before the agreed term is over. 

This charge could be a few months’ worth of interest or a percentage of the remaining balance, making it a significant sum if you’re early in your loan term.

How Does the Application Process Work?

The application procedure is usually less cumbersome than that of a mortgage and can generally be completed within one to three weeks. Here are the steps:

1. Assess Your Situation – Evaluate whether a secured loan is the right fit for your financial needs.
2. Consult a Broker – Contact an expert loan broker to discuss how much you wish to borrow and your preferred repayment term.
3. Market Research – Your broker will scout the market to find the best loan options for you.
4. Hard Search – Agree to a comprehensive financial check from your chosen lender and submit all necessary documentation.
5. Be Responsive – Quickly reply to any lender inquiries, as delays can prolong the process.
6. Property Valuation – A valuation of your asset will be performed to ensure it meets the lender’s criteria.
7. Provisional Contract – You’ll receive a draft contract from the lender. Review all terms, including the total amount repayable after all fees are tallied, before signing and returning it.

The funds are typically disbursed within 48 hours after all contracts are inked, and you’ll need to make your first repayment the following month.

What Type of Self-Employed Loans Are Out There?

In the UK, you’ve got a few different types of loans to consider if you’re self-employed:

• Personal Loans for Self-Employed. Tailored for personal expenses like home upgrades, new vehicles, or consolidating debts.

• Business Loans for Self-Employed. These are perfect for boosting your business. Whether it’s upgrading your office space, buying new machinery, or pumping up your marketing, this loan’s got you covered.

• Secured and Unsecured Loans. A secured loan needs you to put up something valuable—like your home—as collateral. This can increase your chances of getting approved and might even get you a larger loan. Unsecured loans don’t require collateral, but they might be tougher to get.

What Do You Need to Apply for a Self-Employed Loan?

If you’re self-employed and looking into secured loans, your broker will guide you through the required paperwork. At the very least, you’ll need:

• Proof of Identification – A valid passport or driving license to prove who you are.
• Proof of Address – A utility bill works. If you’ve lived at your current address for less than three years, you may also need proof of your old address.
• Company Information – If you own a business, you’ll need documents that prove it, like incorporation papers, and business accounts verified by a chartered accountant.
• Tax Returns – Up to three years of SA302 tax returns related to your self-employment or your company.
• Bank Statements – At least three months of personal or business bank statements showing your income and expenses.

Be prepared to provide more documents if your lender asks. The faster you get them these papers, the quicker your loan process will be.

The Bottom Line

In today’s lending landscape, brokers understand that no two applicants are the same. Working with a broker provides you with invaluable insights from the inside, including the success rates of borrowers similar to you. Independent brokers can scan the entire market, not just high-street lenders, unveiling a variety of loan options at competitive rates.

That said, it’s crucial to seek independent financial advice before taking the plunge. Fully understanding the terms of your loan can save you from future headaches. Keep in mind, that failing to make repayments on secured loans puts your assets at risk.

Ready to simplify your loan application journey? Fill out this quick form, and we’ll match you with a knowledgeable loan advisor who can handle the paperwork and guide you through the process.