Should you apply for personal loan if you are Self-Employed?

A personal loan is the most attractive option to consider if you are in urgent need of liquidity and fast. These loans are very flexible, as they can be used for anything; i.e., the bank does not provide you this loan for a specific purpose, you are free to use it as you see fit. These loans are made to salaried employees as well as self-employed people.

Who are self-employed individuals?
Self-employed individuals are the sole proprietors of their business. They do not draw a fixed monthly salary, but are the owners of their unincorporated businesses. Since these individuals do not draw a fixed monthly salary, some might think that self-employed people find it hard to get personal loans. But, this is not true.

Eligibility criteria for personal loans for self-employed individuals:

1. Credit history: Banks will approve personal loans to self-employed people only if they have a good credit score.  Since they do not have a regular source of income, their credit score is the only indication of their credit-repayment behaviour. However, private lenders are more lenient and offer personal loans even to people with poor credit history.

2. Income: For you to be eligible to apply for a personal loan, you need to have a certain minimum monthly income. Banks have different minimum income expectations, but you need to be earning at least Rs. 25 000 a month if you want to be eligible for a personal loan from a bank.

3. Age: You should be at least 21 years old. Age criteria differ from bank to bank. For example, a leading private bank stipulates that a self-employed individual has to be at least 28 years old to apply for a personal loan from that bank.

4. Business stability: This is another important checkpoint that banks consider before approving the loan application of a self-employed person. You should be in your current business for at least the past two years and counting if you want to apply for a personal loan. Even about this, different banks have different criteria; for example, a leading private bank mandates that you need to be in business for at least five years.

5. Association with the bank: If you are a self-employed individual applying for a personal loan through a bank, then you have to be the account holder of this bank for at least a year before you can apply for a personal loan.

Personal loans are a great way to take care of immediate liquidity needs. They are easy to avail and require less documentation. While personal loans attract higher interest rates, because of their flexible nature, they are a leading choice of every self-employed individual who needs some quick cash.

Disclaimer: Copyright Kotak Mahindra Bank Ltd.