Personal loans are becoming an increasingly popular tool for consumers to borrow money. They are a versatile and attractive way to finance large projects or purchases without paying upfront. Many personal loans tend to have much lower interest rates than other types of consumer debt and come with steady monthly payments and set payoff dates.
Whether you need money to remodel your house or deal with unexpected medical expenses, you may be wondering if you can take out multiple personal loans at once without damaging your credit or creating unmanageable levels of debt. Most lenders do not limit how many personal loans you can have with them, but they may have a maximum amount you can borrow.
We will go over the details of having multiple personal loans and how to decide what makes financial sense for you. That way, you can create a realistic plan for your loans.
- As long as you meet their requirements, most lenders will allow you to take out more than one personal loan.
- To increase your chances of getting a second loan, make consistent payments on existing balances, increase your income, and find the right lender for you.
- If you already have a personal loan, applying for another loan comes with risks, including increasing your debt-to-income ratio and decreasing your credit scores.
- Alternatives to a personal loan include 0% APR credit cards, cash advances, and home equity loans or lines of credit.
Getting Multiple Personal Loans
The good news is that as long as you qualify, you can get a second personal loan, even if you already have one. While some lenders do not allow multiple personal loans, many lenders allow borrowers to take out additional loans as long as they meet their requirements.
Lenders will check your credit reports and verify your income and employment status before disbursing any loans to you. Before applying, look at your debt-to-income ratio because you need to make more money than the payments you are making on your debt to get approved. Lenders want to ensure that borrowers are not over-indebted and can pay off their balances. Additionally, some lenders may have a waiting period or mandate that says you need to make a specific number of on-time payments in full on your first loan before qualifying for a second one.
When you already have a personal loan, this debt will appear on your credit reports for lenders to see. So, the number of loans you can have at a time is more limited by your income relative to your debt rather than by how many loans you can have across multiple lenders.
The table below shows the policies of some of the most popular personal loan providers:
Some lenders may set specific requirements before they let you take out another loan with them. For example, Prosper recommends that you make at least 6 months of consecutive payments on your current loan before applying for a second one. LendingClub requires borrowers to make 3-12 months of on-time payments before getting a second loan. Meanwhile, American Express requires a 60-day waiting period from when you first borrowed a loan before you are eligible for a second one.
While all lenders will say that there is no maximum number of loans from other lenders that would prevent you from getting approved, the amount of existing debt you have will play a huge factor. The more loans you currently have, the greater your debt and the more your income will get strained. Sooner or later, your credit reports will indicate that you do not have the capacity for an additional loan.
Note that the lender will pull a hard inquiry on your credit every time you apply for a loan. That will cause your credit score to dip temporarily by a few points, which can affect your credit standing. So, the more loans you apply to, the more your credit will get negatively impacted.
Ways to Increase Your Chances of Getting a Second Personal Loan
If you want to get a second personal loan, there are several steps you can take to boost your eligibility. Before you apply, check your credit reports for free at AnnualCreditReport.com. Confirm that there are no red flags that may impact your eligibility.
As mentioned earlier, some lenders require you to show that you can make consistent on-time payments before approving you for a second loan. Having a history of regular payments will improve your odds since that shows you are responsible with credit.
The greater your debt-to-income ratio is, the riskier you appear to creditors. So, the more of your existing debt you can pay off, the better you will appear to lenders. If you have the means, try to pay off as much of your other debts as possible before applying for another loan.
The other half of your debt-to-income ratio is just as important. You should aim to maintain a steady income stream or increase it if possible. If you struggle to pay your bills, consider starting a side hustle or get a second job to help you stay financially stable. Alternatively, you can cut costs through budgeting and living below your means.
Avoid asking for more money than you can afford to pay back. Calculate how much money you need to borrow and how much you can afford to repay. The last thing you want is to over-borrow and put your financial security at risk.
If your credit score is not in a good place, ask someone you trust with good credit to cosign on a loan for you. That way, you will get approved for the loan with a much lower interest rate and pay off your debt faster.
Conduct due diligence to find the right lender for you. Lenders generally serve different purposes and have different target audiences, so find a lender that is the best fit for you to improve your odds of getting approved for a second loan.
When Is It a Good Idea to Get Additional Personal Loans?
There are several scenarios where it may make sense to take out multiple personal loans. For example, if you recently took out a personal loan to consolidate your credit card debt, but now you have unexpected expenses, such as auto repairs or hospital bills, it may make sense to apply for another loan. Or, if you recently had a wedding and now need to pay for home renovations, you may want to take out a second loan to cover the costs.
As long as you qualify for low-interest rates and have the means to repay several debt obligations simultaneously, getting a second loan may not be a bad idea. However, if you cannot meet your monthly payment obligations right now, it’s best to seek alternatives, such as a family loan.
Risks of Opening Multiple Personal Loans
Before applying for a second loan, weigh the risks carefully. Just because you qualify for additional loans does not mean it is a good idea. Consider what you need the second loan for and whether it is worth going into more debt for it.
When you apply for several loans, you commit to making multiple monthly payments. These payments will eat up a large chunk of your income and make it harder for you to balance other expenses. If you miss a single payment or make a late payment, you can cause significant damage to your credit score and put yourself at greater risk of defaulting.
Having multiple loans on your credit reports also increases your debt-to-income ratio, which could make qualifying for other loans, such as a mortgage, extremely difficult. You may also end up getting a higher interest rate as a result. Typically, the maximum debt-to-equity allowed is 43%, including your mortgage, so having too many personal loans can disqualify you.
Keep in mind that each time you apply for a personal loan, the lender will run a hard inquiry on your credit. When you apply for multiple loans in a short time, these inquiries can add up and damage your credit score, making borrowing more expensive and difficult in the future.
If your credit score has worsened since you applied for your first personal loan, the lender will see you as a greater risk. That means you could get stuck with a higher annual percentage rate (APR), making it harder to repay your loan.
The more debt you have, the greater your financial stress and strain. While you may have enough money right now to cover all your payments, if your income drops or you get laid off, you become vulnerable to financial insecurity. If you start falling behind on your bills and borrow more money to keep up with your monthly expenses, you could end up snowballing your debt.
However, taking out a second personal loan does not mean you are financially doomed. Assess your overall financial health to ensure you can make on-time payments every month and avoid borrowing more than you need.
How to Manage Multiple Personal Loans
If you are balancing multiple personal loans, do not miss any payments since that will incur extra fees and hurt your credit. One way to avoid this is to set up automatic payments with your lender. But, if you use this method, make sure you have enough money in your checking account every month. That way, your bank account doesn’t bounce the payment and charge you a fee. Alternatively, you can set up a calendar reminder on your phone or set direct payments through your bank.
6 Alternatives to Personal Loans
Personal loans work best for big expenses that you plan out in advance. But, they are a long-term financial commitment, and there are other options out there.
1. Credit Card Cash Advance
If you need cash quickly, you can get a credit card cash advance by withdrawing money from your card at an ATM. Depending on the credit card issuer, you can borrow up to 30% of your credit limit. That means, if you have a $10,000 credit limit on your card, you can use up to $3,000 as a cash advance.
While this approach allows you to get fast cash, the issuers usually charge a high APR (up to 36%) and a 3-5% transaction fee. And unlike a regular credit card transaction, you will get charged interest as soon as you withdraw the money, making this a costly method. We recommend using this method only if you do not need much cash and can afford to pay off your debt as soon as possible.
2. Home Equity Loan or Line of Credit
If you are a homeowner, you can borrow against the equity in your home with a home equity loan or home equity line of credit (HELOC). Usually, you will need at least 15-20% equity on your home to qualify.
When you take out a home equity loan, you will get a lump sum of money upfront that you can use to pay off other debt, remodel your home, repair your car, etc. On the other hand, a HELOC is a line of credit that allows you to withdraw up to a certain amount. Once you repay that amount, you can draw from it again in the future.
Compared to personal loans, interest rates on home equity loans and HELOCs will be lower. But, that is because the lender can use your house as collateral. If you default on your loan, a bank or creditor could repossess your home, making this much riskier than a personal loan.
3. 0% APR Credit Card
If you have good credit, you can qualify for a 0% APR credit card, which typically does not charge interest during its introductory period. If you have a major expense coming up, you can use this credit card to finance the costs interest-free for 6-18 months depending on the card. While you will still need to make the minimum payments each month, you can pay off the rest of your balance at no additional cost.
When the introductory period ends, you will get charged a predetermined rate. If you still have a balance, you will start owing interest on the amount left. But, if you can repay your debt before then, you can end up saving a lot of money on interest charges.
4. 401(k) Loan
If your current employer has a 401(k) program, you can take out a loan against your existing investments. You can borrow up to $10,000 or 50% of your vested balance up to $50,000, depending on which is greater. For example, if you have $50,000 in your 401(k), you can borrow up to $25,000.
When you pay interest on a 401(k) loan, the interest gets deposited back into your account. Generally, the loan term is 5 years, but if you lose your job or quit, you will only have 90 days to repay your remaining balance or face a penalty and taxes.
If the expense is not urgent, consider building a sinking fund or emergency fund instead. That way, you do not need to borrow money or risk paying interest charges.
A sinking fund is money you save for planned expenses, such as a vacation or wedding. On the other hand, an emergency fund is for unexpected events, such as a lost job or your car breaking down. The general rule of thumb is to save at least 3-6 months of your expenses in an emergency fund. Currently, I have about 6-8 months of savings in a high-yield savings account to be safe.
6. Payment Plan
Depending on what you buy, you may be able to work out a payment plan with your merchant or service provider. Buy Now, Pay Later apps are becoming increasingly popular and are a way for consumers to split the costs of their expenses over several months. Many doctors and dentists also offer payment plans for their patients to help them spread out the costs of more expensive procedures.
The Bottom Line
Personal loans are a great way to finance various projects and purchases. But, taking on more than one personal loan payment at a time can be costly. Before sending in the loan application for an additional personal loan, think carefully about your financial situation and whether you can handle more than one personal loan simultaneously.