The so-called “Low Doc Loan” is a facility introduced by banks over the past 15 to 20 years in response to the ever increasing numbers of people using the internet to make money. These loans are intended for use by individuals like bloggers who have no consistent workload and incomes which are hard to verify. So what are low doc loans and why do bloggers need them?
Traditionally people applying for a home loan would prove their income by showing several years of pay slips from work and a bank statement. It was simple, 99% of people had pay slips and tax return papers. It took a little more effort if you were a consultant but by using a one man company, showing a contract and some healthy bank statements, it was usually possible to get what you wanted.
The internet has had many effects on our world, in particular how many people now work and get paid. In just 20 years the percentage of the world’s population with regular internet access has grown from to 0.5% to over 50% (Internet World Statistics as of September 2016).
Companies and individuals work together and payments are made without any verifiable records or paper trail, this being particularly true of the blogger. Government surveys indicate that 15 – 20% of the eligible workforce of the US and the UK now work from home, approximately half via the internet. Their work and income can be completely off the radar of tax and banking systems. That represents millions of potential business and homeowners who do not have the paperwork to satisfy the old banking loan procedures.
In response, the banks have reacted to the requirements of people like homework helpers, online tutors and bloggers by introducing the low doc loan. Generally speaking by showing bank statements for the past year, some samples of what you do and for whom you do it, a business or home-related loan can be authorized.
Many websites which specialize in online freelance work have built tracking systems into their operations which make it easier for the casual worker to effectively prove their income. If you can show so many hours and so many dollars per month you are nearly there. The last step is so-called “self-certification” where you sign a guarantee that you can afford the loan. There is no need for tax returns or company statements.
Because there is an added risk for the banks with these cases a low doc loan will usually come with a higher interest rate. In recent years with interest rates being very low, this has made little difference, jumping from 2 to 2.5% on a typical home loan. Be aware that the difference will increase as interest rates go up and this will make a big difference to your monthly payment as well as a significant difference in the long term.
As always when borrowing money, do not commit to a long term loan if you are not sure you have the long term income to pay it back. Once you sign up you are no longer an invisible online worker, you are back in the system, you cannot just start with a new username if things go wrong, and you will be held accountable.