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Self employed individuals tend to pose a problem for lenders because of the difficulty verifying income and generally trusting what the self employed person really does or how successful they are. So I wanted to do some research to see what the impacts are for ROI (return on investment) for the self employed versus those employed full time.

The results I got revealed a pretty even and steady ROI at the AA, A and B credit grades, with full time employed people providing a slightly better return. But things turn sour for self employed borrowers at lower credit grades.

Default rates for C grade and lower loans turn downwards as expected for both full time and self employed loans, but the downturn is much more acute for self employed borrowers. The conclusion here is that, in general, it’s hard to verify what self employed people at a lower credit grade are reporting in the loan funding request, so the risk of misrepresentation increases. For example, the D and E credit grades have twice the default rate of for self employed borrowers as that of full time.

Does this make lending on to self employed borrowers at lower credit grades prohibitive? Not necessarily, but lenders should demand a much higher interest rate to mitigate the risk.

So, in conclusion, self employed borrowers with AA, A and B credit grades are about the same risk level as borrowers which are employed full time but this changes for credit grades of C and below. For these loan requests, a large amount of caution should be employed.


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