Secured Loans for Self-Employed People

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ABC FinanceSecured loansSecured Loans for Self-Employed People
Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in secured loans

Secured loans for self-employed people offer a strong route to borrowing the funds that you need. While the variable nature of self-employed borrowers income can make unsecured loans difficult to come by, loans secured by property don’t tend to have this issue.

If you own your own home or have another asset with sufficient equity to act as collateral for a secured loan, you’re much likelier to have your application for borrowing accepted.

What is a secured loan for self-employed people?

A secured loan is a line of borrowing that is secured against property and repaid every month. The differences between a secured and unsecured loan are:

  • You’ll need to place an asset on the line as collateral to obtain a secured loan. Most people use the equity in their homes.
  • Secured loans allow much larger borrowing than unsecured loans, which are typically capped at £25,000.
  • Secured loans typically attract lower interest rates.
  • A secured loan will usually be easier for a self-employed person to obtain.

Many lenders consider self-employed borrowers to be a financial risk, as they lack a consistent monthly income and are, on paper, likelier to default. The risk lies on your shoulders when your loan is secured against a valued asset.

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How do secured loans for self-employed people work?

Secured loans for self-employed people work much like any credit agreement. You will be expected to make monthly repayments on the loan to reduce the overall balance, plus interest.

As the loan will be secured against an asset, this must be valued before lending can be agreed. How much you can borrow depends on the value of this asset and the amount that you currently owe.

Your asset is at risk if you fail to repay a secured loan. If you secured the borrowing against your home, the lender could take you to court if you fall behind on payments. If the court rules in favour of the lender, you can be forced to sell your house and settle the outstanding debt using the proceeds or face repossession.

As a self-employed person, this means that you should consider whether a secured loan is the best product for you. Only look to take out this line of credit if you are confident that your business income will enable you to keep up with repayments, and that doing so will not plunge your personal or business finances into trouble.

Who can get a self-employed secured loan?

If you have been trading as a self-employed person or ltd company business for six months or longer, and have an asset with sufficient equity to meet your request for borrowing, you will be entitled to apply for a secured loan. However, be aware that some lenders will not entertain applications from anybody that has been self-employed for less than two or three years.

Beyond your time spent trading, whether your request will be approved depends on a range of additional factors. Always work with an FCA-approved secured loan broker to ensure you get the greatest possible deal and to enhance your chances of a successful application.

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What rates will I pay on a self-employed secured loan?

As discussed, the interest rates on a secured loan tend to be more favourable than those on an unsecured alternative. This is an acknowledgement from the lender that you, as a borrower, are taking on more risk.

The rate you are offered will depend on your personal circumstances and the Bank of England base rate. At the time of writing, the average interest rate for a self-employed secured loan is around 7% per year.

Are there other fees to consider?

In addition to your interest rate, you’ll need to consider other expenses associated with taking out a self-employed person’s secured loan. These include:

  • A set-up fee from the lender.
  • Professional expenses accrued by the lender, such as property valuations.
  • Your broker’s fees. This may be a flat rate or a percentage of the total loan value. ABC Finance charges a fixed fee of £1,495, regardless of how much you borrow.

These expenses will be added to the total repayable, so your balance will be higher than the sum you borrowed when you open your secured loan account.

Another cost to take under advisement is a potential early exit fee if you wish to pay off your secured loan early. When you take out the loan, your interest rate will be offered on the basis that you will see the term through to completion.

If your business takes off, you may be able to repay the loan early and release your property from its status as collateral. In doing so, the lender will miss out on months, maybe even years, of interest payments.

To combat this, lenders will include an early exit fee, known as early repayment charges when concluding a loan before its natural term comes to a close. This could be a handful of interest payments or a percentage of the outstanding balance.

The latter can lead to a substantial fee if you plan to end your agreement early into the loan term, so take the structure of exit payments under advisement when planning your loan agreement.

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What is the application process?

The application process is fairly simple compared to a mortgage and can be completed in around 1-3 weeks. You will need to complete the following steps in order to get a secured loan:

  • Weigh up all the pros and cons of a secured loan, confirming if this is the best line of credit for your circumstances.
  • Make contact with a professional secured loan broker. Confirm how much you want to borrow and how long you wish the repayment term to last.
  • Allow your broker to investigate all options on the market and feed back to you with the best deal for your circumstances.
  • Agree to a hard search from the lender of your choosing, beginning the process of applying for the secured loan. Provide any documents requested by the broker on behalf of the lender.
  • Respond to any queries made by the lender. Always be on hand to answer emails or phone calls – do not delay, as this will just mean you end up waiting longer for the process to complete.
  • Wait for a valuation of your property to confirm that your request complies with the lender’s rules and regulations.
  • Receive a provisional contract from the lender. Check this over and ensure you are happy with it – paying attention to the total repayable sum once all fees are added, and reading any small print. Sign and return the contract if you’re willing to commit to the loan.

It typically takes around three weeks to complete an application for a secured loan. Once all contracts are signed, you should receive the funds within 48 hours. The first repayment will be due the next month.

What documents do I need when applying?

Your broker will confirm what documents are required when applying for a secured loan as a self-employed person. Expect to be asked for the following, as a bare minimum.

  • Photo proof of your identity, such as a passport or driving licence.
  • Proof your residential address, such as a utility bill. If you have lived at your current address for less than three years, you’ll need proof of your former addresses too if it can’t be verified using the voters roll.
  • If you trade as a company, proof of your company status, such as incorporation documents.
  • Up to three years of SA302 tax returns, either relating to self-assessment or a company you represent as owner and director.
  • No less than three months of business and/or personal bank statements that detail your monthly incomings and outgoings.

Your proposed lender may ask for more documents over time, so ensure that you are always available to provide anything you are asked for. The more you delay getting key documents and paperwork to a lender, the longer the application will take.

What factors impact whether my application will be approved?

Key factors that influence a lender’s decision as to whether to approve a self-employed person’s request for a secured loan include:

  • How much you wish to borrow, over how long.
  • Your personal credit history. This is not the end-all, be-all when it comes to secured loans, but it will likely play at least some role in a lender’s thinking.
  • The security of your asset – lenders are likelier to approve a secured loan against a well-maintained property that will retain its value.

Frequently Asked Questions

This depends on how much equity you have to secure the loan against. Most lenders will let you borrow at least 80% of your total equity – some will go up to 95%. The maximum LTV on buy to let secured loans may be slightly lower.

Your broker will negotiate a repayment term with the lender based on your wishes and affordability. Repayment terms on a secured loan tend to be much longer than unsecured borrowing. You can theoretically take out a loan on repayment terms of up to 30 years.

Longer loan terms mean lower monthly repayments and can result in more attractive interest rates, but they will cost more overall. Making repayments for 25 years at an interest rate of 4% will lead to a larger sum repayable in total than a 15 year term at 5.5%.

A self-employed person can use a secured loan for all the same reasons as a salaried employee – making a one-off purchase, consolidating multiple unsecured debts into one monthly repayment, or conducting essential home improvements.

You could also use a secured loan to invest in your business as a self-employed person. You may wish to purchase new hardware or stock, or lay down a deposit for a business trading premises. These loans are known as secured loans for business purposes.

Yes, you can still get a self-employed secured loan even if you have a bad credit rating.

We work with specialist secured loan lenders who offer products specifically for borrowers with CCJs, defaults or a low credit score. Bad credit secured loan rates tend to be a little higher than standard products, although the difference is smaller than is the case with unsecured loan products.

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