Loans plans for the self-employed are changing.

Interest rates on loans are determined by a number of factors, many of which relate back to the risk of the loan not being repaid. Loan providers operate within a set of defined rules and procedures which determine the rate they are able to offer to any new applicant. Where the risk of the loan not being repaid is low, then loans are offered at cheaper rates.

If lenders view that risk to be increased, based on a whole mix of criteria which contribute to a risk calculation, then they will reduce their potential losses by charging a higher rate of interest. That increase in receipts from loan repayments is designed to cover any losses from unrepaid loans.

Lenders will carry out credit checks on individuals to ascertain their past history of repaying debts and they will also look at earnings and outgoings to be able to take a view on the cash available in the household to repay the new loan

For employed people they will usually ask for a number of recent payslips in order to verify a person's regular income, but for self-employed individuals, these payslips are often not available.

In these situations an individual is asked to self-certify their income in a signed letter. For these particular cases lenders are now lending smaller amounts, restricting it to 70% of their LTV (loan to value), which is a figure which relates the loan size to the value of the equity in the borrower's property.

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