If you work for yourself, then you might face a struggle when you attempt to convince lenders that you’re worthy of a loan. If you can’t demonstrate that you’ll make the repayments easily, then you’ll be perceived as potentially unreliable – and this perception will tend to be reflected in the overall cost of your debt.
It’s worth thinking about why this is, what we can do about it, and what you can expect to pay.
How lenders size the amount
Lenders will want to know how much you earn, how much you have to pay to other lenders, and how valuable any collateral used to secure the loan actually is. The interaction between these three might dictate the amount you’re granted, as well as the interest rate. For example, a person who has a modest income, but no other debts, might be given the same offer as a person who earns a great deal, but has many other debts to pay.
How rates are set
Interest rates are informed by the amount of risk the loan is going to impose on the lender. The same goes for the length of the term. If the lender thinks that you stand a reasonable chance of defaulting, they’ll often demand that the term be longer – since this will help to make the loan more lucrative for them.
A key thing to consider is the loan-to-value ratio. This describes the relationship between the asset(s) being used as collateral and the amount being borrowed. If you’re securing a £20,000 loan against a £500,000 house, then you might be offered much more favourable terms than a person seeking a £480,000 loan against the same house.
Choosing the term
The longer the loan’s term, the more interest you’ll end up paying over time. Shorter terms are better – provided that you can afford to make the payment each month. Remember that you can overpay – but that, in some cases, doing so will incur additional charges.
Self-employed people might benefit from more flexible arrangements, and looser evidence requirements – which is where specialised self-employed loans can be so beneficial.
Improving your offer
So, what practical steps might you take to bolster your case?
To begin with, you’ll want to ensure that all credit rating agencies have an accurate view of your finances. The same applies to the lender you’re applying to: present them with good financial information, ideally after you’ve had a good quarter. You’ll also want to minimise revolving balances, and keep your credit utilisation low – ideally, less than 10%.
Read the small print
There are a number of other considerations worth bearing in mind. Your lender might impose additional fees in certain situations. These include the extra charges you’ll pay when you repay early. In some cases, the interest rate you’re charged will vary according to the Bank of England’s base rate, or some other interest rate. Make sure that you’re aware of exactly how your loan works before you commit to it.
