Sometimes people find themselves in need of a personal loan for purchases, debt consolidation, or a host of other potential reasons. If this happens to you, but you already have a personal loan outstanding, you may still be able to get another loan.
You can have more than one personal loan legally, but lenders have different rules for approval. Whether or not you should have more than one personal loan, however, is another question. Personal loans have the potential to negatively impact your credit and your financial situation.
Personal Loan Basics
A personal loan usually comes in the form of a lump sum payment to you, which you have to repay in fixed monthly payments at a fixed interest rate.
Personal loans fall into two categories: secured and unsecured (link to secured vs. unsecured debt). Secured loans require collateral, which is an asset such as a car or a home that the lender can seize if you don’t repay the loan. Unsecured loans require no collateral and are made solely on the lender’s assessment of your creditworthiness. If you don’t repay the loan, the lender may sue you for repayment.
Generally, in most contexts, the term personal loan refers to unsecured personal loans, but by definition a personal loan can be both secured or unsecured.
How Many Personal Loans Can You Have?
No specific limit exists on the number of personal loans that you can have. However, lenders have their own rules when it comes to approving you for a personal loan if you already have one. This is true whether the existing loan is with the same lender or a different lender. Getting a second or even a third personal loan may be a red flag to the lender that you are having financial difficulties or accumulating too much debt. Other rules may also apply.
Qualifying for Multiple Personal Loans
If you apply for a second personal loan, lenders will assess your ability to make payments on the second loan or both loans if you are applying with the same lender. This will involve looking at not only your history of making timely payments, but also your debit-to-income ratio (DTI), which is the amount you pay on debts compared to your income. For example, if you earn $5,000/month and have $2,000 in monthly debt payments, your DTI is 40%. The lower your DTI, the better.
If you are applying with the same lender, they may have other rules for approval of your second loan. For example, you may not qualify until you’ve had the first loan for a specific period of time or have made a certain number of payments. They also may cap the total amount of debt that you can have with them, or the number of loans that you can have with them.
Note that if you apply for a secured loan using your home or a car as collateral, qualifying may be significantly easier, but debt to income and credit requirements will still apply.
The Effects of Multiple Personal Loans on Your Credit
Your credit is an important asset to protect, so you should understand how multiple personal loans can affect it. More than one personal loan can have both potential negative effects, but also a few potential positive effects.
Potential Negative Credit Effects of Multiple Personal Loans
- Applying for multiple loans can result in multiple hard inquiries on your credit report, which can lower your credit score temporarily.
- Your credit report will show increased debt obligations, which may make it more difficult to qualify for other credit.
- If you have difficulty making payments on all your loans, missed or late payments will negatively impact your credit score.
- Lenders may see multiple loans as a red flag that you are overextending yourself financially.
Potential Positive Credit Effects of Multiple Personal Loans
- Making on-time payments on multiple accounts may boost your credit score.
- Paying on a variety of types of credit accounts may have a positive impact on your credit score.
Alternatives to Personal Loans
Getting multiple personal loans may not be your only option. You can consider several alternatives.
- Low or 0% interest credit cards: If you have excellent credit, you may qualify for credit cards that have low or 0% introductory rates. This can be good for consolidating credit card debt at a lower cost, or for purchases that you plan to pay off in a relatively short time frame. If the low rates are introductory only, be sure to pay your balance off before those rates expire to avoid high finance charges.
- Home equity line of credit (HELOC): If you own a home and have equity available, you may be able to get a HELOC. This allows you to use only what funds you need when you need them and pay interest only on the funds that you use. HELOCs are great if you’re looking for funds for home improvement or another large expense.
- 401K loans: 401K loans allow you to borrow against your retirement plan and repay it through your paycheck. You pay interest, but you’re paying the interest to yourself. You can generally borrow up to 50% of your vested balance, subject to IRS rules. Be sure to do your homework to understand the rules and tax consequences of these loans.
- Payment plans: If you have expenses such as medical bills or legal fees, providers will often let you pay in installments. You just have to contact them to see what arrangements you can make.
- Cash advance apps: If you need short-term money quickly, cash advance apps let you get part of your paycheck early. When you get paid, the money will generally be paid back directly from your bank account. These advances usually don’t involve interest, but certain fees may apply.
- Buy now pay later: These plans allow you to make a purchase by making payments over a period of time. Generally, no fees or interest are charged.
Be Careful When Taking on Multiple Personal Loans
While it’s possible to have multiple personal loans, that doesn’t necessarily make it a good idea. Adding to your debt (link to debt category page) means adding to your monthly obligations. You can quickly find yourself in financial deep water, struggling to keep up. If you’re unable to make all your payments, your credit will suffer and you could be sued by the lender or lenders.
Access to multiple personal loans also may tempt you to spend more than you can afford. It’s best to live within your means and not dig yourself into a hole that you can’t get out of.
Too much debt can also keep you from qualifying for other types of loans. For example, if you want to buy a home, strict DTI requirements apply. If your personal loan payments are too high compared to your income, you may not qualify for a mortgage loan.
In Closing
Taking on multiple personal loans should not be done lightly. Take a careful look at your budget before deciding to do so to make sure that you’ll be able to afford multiple payments. Also consider other factors like the effects on your credit, and the amount of interest you’ll pay in the long run. Ask yourself if the purpose of the funds you’re getting is really worth taking on more debt. Your long-term financial health should be your top priority.
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