Loans are an everyday fact of life. Whether it’s a student loan, auto loan, or personal loan most people use debt at some point in their lives.
There’s no limit to how many loans you can have at one time, but you’ll want to make sure you take out only what you can tackle.
Understanding how loan applications work, what personal loans are, and how they can work for you will help you find out the best number of personal loans for you. Let’s dive in!
- The number of loans you can have at one time is limited by your credit score and your debt to income ratio — a measure of how much of your monthly income goes to debt payments. But as long as a lender approves you can have as many loans as you want.
- Before approving a loan, a lender will analyze metrics such as your credit scores, loan repayment trends, and debt-to-income ratio.
- Downsides of taking out too many loans affects your quality of life through mortgage ineligibility, a low credit score, and taking part in a debt cycle.
- Personal loan alternatives vary on how much money you need and your timeline and include an emergency fund, a home equity loan, or a 0% APR credit card.
What are Personal Loans?
Designed for short to medium-term use, a personal loan gives its user financial flexibility. A personal loan offers a fast and easy source of funding and can be used for almost anything. They’re commonly used to cover major expenses such as weddings, home improvements, vacations, and emergencies.
You can get one from your local bank, credit union, or online lender. Once approved, you’ll get the cash all at once and will be expected to start repaying monthly. The lifespan of a personal loan is usually 1-7 years, depending on the loan’s terms. Because this type of loan doesn’t require the borrower to offer up collateral, it’s unsecured. As a result, personal loan rates are high and around January 2023 they range from 5% to 36%.
Last year, I took out a personal loan to fund the purchase of a new mobile phone in an emergency, due to favorable loan terms. Compared to a credit card, it’s better to use a personal loan because of its fixed interest rate and repayment terms — which bring stability to your financial situation.
But it’s better to tap into your cash savings or emergency fund to tackle life’s unexpected moments.
When Does it Make Sense to Take Out Multiple Personal Loans?
It’s a great idea to use personal loans when their advantages come into play — mainly their fixed interest rate and repayment terms.
Here are some examples where it works to use more than one loan:
Personal loans are often used to pay off high-interest debt (e.g., credit card debt) through a debt consolidation loan. It bundles together multiple debt sources into a single loan with one monthly payment. The main benefits to consolidate debt are simplifying your payment process and lower your interest rate — saving you time and money.
Say you consolidated your debt with your existing personal loan but got into a car accident and need to pay for both hospital bills and car repairs that exceed your emergency fund. It makes sense to take out a second personal loan to cover the remaining balance.
In a more festive instance, if you had a family vacation and need to pay for home renovations, then taking out a new loan work too. Home renovations can increase the value of your home. Depending on the purpose of new loan, you may get special terms if you go through the same lender you used for the existing loan.
Overall, it’s worth it to have multiple loans if you can secure the best personal loan offers, which come with low-interest rates and favorable repayment timelines. Of course, it makes sense only if you have a reason for the extra funds and the capacity to make your extra monthly payments.
Last year, I took out my first personal loan to fund the purchase of a new mobile phone in an emergency, due to favorable loan terms. Compared to my credit card, it was better to use a personal loan because of its favorable repayment terms — which fit better within my financial situation.
How Many Loans Can You Have at Once?
Qualifying for Loans — How It Goes
It’s easy to get a second personal loan or multiple loans if you qualify for the lender’s terms. Though some lenders do not offer personal loans, others do. Here’s how the approval process goes:
Once you file a loan application, lenders will check your credit and check your stated income and employment status to ensure you are truthful. They’ll look at key metrics such as your debt to income ratio (DTI) and the number of credit accounts.
It’s best for you to understand your DTI before applying so you can calculate how spending on more debt will affect your budget. Your DTI is calculated as:
total monthly debt payments divided by gross monthly income
A lender wants to know that you are capable of paying them and do not carry too much debt. As few limitations apply, many lenders may require you to make a set number of on-time payments or wait for a set amount of time before you can qualify for another loan. This can make it difficult to get loans from the same bank.
Assuming you already have a personal loan, lenders will see it on your credit report and know how much you owe on it.
How many loans you have across different lenders does not matter as any lender will look at your credit and understand your current debt obligations.
Knowing Terms for Specific Lenders
This table lists the terms of popular lenders, including their maximum loan amounts and each lender’s maximum number of loans.
Based on other factors, each lender can set unique requirements before granting additional loans:
- American Express mandates a 60-day waiting period from your first loan before you can qualify for a second loan
- LendingClub wants borrowers to have a 3-12 months record of on-time payments for the first loan before they can apply again.
- Prosper asks for six months worth of payment on current loans.
Lenders state there is no maximum number of loans threshold that would stop a person from getting approved. However, any lender will take your existing debt level into account. Usually the more loans you have open then the bigger your debt load is.
Thus, a lender views a person with multiple loans as having less income to handle another one — making them less creditworthy. Ultimately, the maximum loan amount you can have at one time is limited by how your income stacks up to your existing debt.
Downsides of Taking Out Multiple Personal Loans
When you request another loan, you signal to the lender that you are willing to make multiple monthly payments – if your loan application is approved. It’s best to compare how the added benefit vs the cost of multiple loans. Some downsides you should be aware of include:
1) Because personal loan payment takes up a good portion of your income, the more debt you have the harder it is to put your money towards saving, investing, or recreational expenses.
2) Missing a single payment or making a late payment can damage your credit score by affecting your credit history, your track record of on-time payments. Also, this damage to your credit score can put you at greater chance of rejection when you apply for a second personal loan.
3) Having two loans or more on your credit report, will increase your debt to income ratio (DTI)— making each additional loan more expensive to take on.
The higher your DTI is, the more difficult it is to qualify for other loans, whether it’s a mortgage or additional personal loans. Even if you are approved, you will likely pay higher interest rates on your new loan, greatly adding to your monthly loan payments and overall financial burden.
If you need a mortgage, having too many personal loans could weigh you down as most lenders have a cutoff for mortgage approval at a maximum debt to income ratio of 43%. Generally, lenders require a DTI below 36% with up to 28% of that debt going towards your rent or mortgage.
4) Each time you apply for a loan, your credit score can drop as most lenders run hard inquiries on your credit report (affecting the ‘New Credit’ part of your score). A hard inquiry shows up on your credit history and temporarily lowers your score. If you apply for multiple personal loans in a short time frame, the impact of each inquiry will build and result in lower credit scores — even if you have good credit history. A hard inquiry stays on your credit report for 2 years.
As a result, borrowing again or opening up a credit card will be more difficult as many lenders will turn you down with your low credit score — leaving you with less reputable lenders. More commonly, lenders generally will offer worse terms with higher annual percentage rate (APR).
5) The greatest downside is the increase in stress and a decrease in your quality of life as your financial situation worsens. Having multiple loans can start a debt cycle, where each loan is more expensive than the last one and interest payments snowball in size — cutting further into your budget.
In harder economic times (like these), there’s a higher chance you could be laid off or see your income fall — making you more financially insecure and likely to fall into the vicious debt cycle as interest charges consume your monthly income.
Taking on a second personal loan or another with consideration to your overall financial health is the way to go.
Look at your financial situation to ensure you borrow only what you need and that you make on-time payments while maintaining your existing budget and credit standing.
Keeping Track of Your Personal Loans
Learning to manage multiple personal loans is similar to looking after your credit cards. You’ll have to track your payments and balances. Here are a few things to keep in mind:
- Make payments on time to maintain your credit score and avoid late fees.
- Setup automatic monthly payments to your lender from your checking account before each monthly balance is due. Mark the date of payment in your calendar.
- Connect your accounts with each lender to a personal finance app like Mint or Personal Capital, where you can track your loan balances, payment trends, etc. — all on one screen.
- Check your credit report once a month. Use a free credit score service like using a personal finance app or a site like Credit Karma or AnnualCreditReport.com to understand how your personal loans are affecting your credit scores.
- Do your research on a lender before applying for a loan so you know what their terms are and how they do business. Some are less reputable than others.
Personal Loan Alternatives
A loan is a long-term commitment that works best for larger expenses that number in the high four-figure or five-figure ranges. If you’re feeling a personal loan isn’t for you, it’s all good — there are other options for you.
Emergency Funds & Personal Savings
Before considering other options, tap into your emergency or sinking fund first. If you tap into your funds, you avoid any sort of loan or interest charges. If you are earlier on in your financial journey, make building an emergency fund one of you first priorities.
Your emergency fund will be your safety net for unexpected events like going through a layoff or medical emergency. It should be large enough to cover 3-6 months of your expenses. Otherwise, sinking funds are for planned expenses such as buying a new car or a vacation. It’s best to store either type of fund in a high yield savings bank account like with Ally Bank.
Home Equity Lines of Credit (HELOC) aka Home Equity Loans
If you own a property, you can borrow against the equity you have in it with a HELOC or home equity line of credit (also called a home equity loan). It’s a credit line where you withdraw a certain amount of value of your property in the form of cash, with the property used as collateral.
To be approved for a HELOC, you’ll need at least 15-20% equity on your property. Note you can still take out a HELOC even if you have a mortgage on that property — as long as you fall within the equity range.
Once your HELOC is approved, you’ll get your cash upfront. You can use those funds for a variety of things such as buying a new car, starting a business or more commonly for home remodeling or to finance a purchase of another property.
Because the property (usually your home) is collateral on the loan, your interest rate on a HELOC will be lower compared to the rate on a personal loan. If you default on your HELOC, then the lender can takeaway your home — adding more risk. On the other hand, once the loan amount is fully repaid, you could draw from it again if needed.
Loans from a 401(k)
If you have a 401(k) plan through your job, you can take a loan against it — using your investments as collateral. You can borrow up to the greater of the two, whether its up to $10,000 or up to 50% of your vested balance capped $50,000. The term vested refers to how much of the money you wholly own, which varies according to your employer’s vesting schedule. For instance, if your 401(k) has $100,000, you can take a loan out up to $50,000.
As you pay interest on your 401(k) loan, it goes back into your account. Usually, a 401(k) loan term is five years. But if you quit or get fired you will only have 90 days to repay the balance or else pay penalties and taxes.
If you require fast access to cash, you can use your credit card at an ATM to get a cash advance. The max amount you can pull for a credit card cash advance depends on the credit card issuer but tends to cap out at 30% of your credit limit. For instance, if you have a $25,000 credit limit on your Chase Sapphire Preferred — you could use up to $8,250 for a cash advance.
This method works best when you need cash quickly and don’t have access to your debit card/ checking account, such as if you are traveling in a foreign country. When I traveled across Europe, I learned about the cash advance policy for each of my credit cards just in case I needed emergency cash.
But cash advances have their downsides too, as card issuers charge transaction fees of 3-5% and high APRs — which can go up to 36%! The issuer will start charging you interest the moment you have the cash in your hands, unlike regular credit card use – making the interest add up fast! A cash advance is best treated as a method of last resort and if you really need a bit of cash and can afford to pay it off as soon as you gain control of the situation.
0% APR Credit Cards
Let’s say you have some solid credit, then you can qualify for a 0% APR credit card which charges no interest during the introductory period — like the Citi Double Cash. If you anticipate having a large expense, then use a 0% APR card to cover it without interest for 6 to 18 month period. You’ll have to make minimum payments on the balance monthly, but you’ll do so with no interest charges — basically getting a short-term, interest free loan!
However when the 0% APR period ends, your interest rate will change to the card’s preset rate and you’ll be charged interest on any remaining balance. It’s best to plan and time your monthly payments so you payoff the balance before interest kicks in.
You can also use a balance transfer credit card to move your debt to another 0% APR card, though you will incur a balance transfer fee (usually 2-5%).
Sometimes a store or service provider offers payment plan options. This is common for purchasing home appliances, such as washing machines or a refrigerator or by doctors and dentists for more pricey procedures. There’s also Buy Now, Pay Later apps which help customers divide up the costs of a purchase over several months and are growing in popularity.
The Bottom Line
Personal loans are a good tool to reduce your debt or make a special purchase. Like with most financial decisions, taking on many personal loans (let alone one) can either be a costly choice or work out great — if you carefully consider your financial situation. This means factoring how much debt you plan to take on, how you plan to do it, and how it will affect your quality of life — so you can make an informed decision.
A big part of personal finance is knowing your available tools and using the one best suited for your needs, which may not be a personal loan. Whether you take out two loans, one, or none, we hope this walkthrough has been helpful to your future financial life.