Can you take out a second personal loan?
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Personal loans are growing rapidly in the United States. The amount Americans owe on personal loans almost doubled in four years, according to data compiled by the Chamber of Commerce, for a total of $ 143 billion.
About 16% of Americans plan to apply for personal loans to help pay their bills and other loans, according to recent data from credit company TransUnion. People with higher incomes are even more likely to consider also a guaranteed loan: 21% of Americans with incomes over $ 100,000 are considering one, compared to 14% of those with less than $ 100,000.
“If you are facing debt problems, you are not alone,” says Brent Weiss, Certified Financial Planner at Facet Wealth.
But while many other people may share a similar situation, you should be wary of personal loans to get yourself out of debt, especially if you already have one.
The decision to take out a second personal loan depends entirely on your personal situation. But you should never take on more debt than you need, says Weiss.
“Most people hack leaves, and they should hack at the root, which basically means most people are trying to solve the financial challenge they’re having instead of what’s causing the problem,” Weiss says.
Here’s what you should consider before taking out a second personal loan.
How many personal loans can you have at one time?
The number of personal loans you can take out will vary among lenders. In most cases, you can have more than one loan at a time, but especially consider whether you can handle additional debt.
You’ll also want to take into account your financial history, credit score, and monthly income versus expenses before you apply, as these factors are what lenders look at to determine if they should give you more credit. Most have minimum credit and income requirements, and will only approve borrowers who meet them.
If you apply for multiple personal loans in a short period of time, lenders might see this as a red flag, especially if one of your applications has been denied. Some lenders have policies on borrowers who apply for multiple personal loans.
For example, SoFi requires borrowers with one or more existing personal loans having made at least three on-time payments on each loan to be eligible for another personal loan.
4 things to know before getting a second personal loan
While you can take out multiple personal loans at the same time, it can seriously affect your credit score and overall financial health, especially if your finances are not healthy.
Whenever you can avoid getting into more debt, you should, says Justin pritchard, Certified Financial Planner at Approach Financial in Colorado. Instead, try to find better alternatives to borrowing, says Pritchard.
“Try to sell things or do some extra work temporarily. Reducing expenses is also a popular option. Neither option is fun, but it’s better than taking on additional debt because it’s additional risk and can limit your options in the future, ”he says.
If you have a emergency fund, you can tap into that, or start building one if the expense can be delayed. You can also look at debt consolidation loans, which consolidate your existing loan and any additional credit card debt into one loan, or balance transfer credit card.
Many balance transfer credit cards offer an introductory period with 0% APR on new purchases and transfers for a limited time, so you can start paying off debt without paying interest. However, if you don’t pay off the balance you transferred during the introductory period, you could end up with high interest payments.
Another option is to check with the lender if they offer flexible payment plans. This way you can spread the payments over a longer period.
Before applying for a second personal loan, also consider the following.
You could get into more debt
If you are planning to use a personal loan to pay off other debts, the loan itself may be more of a problem than a solution.
You can easily fall into a vicious cycle of debt because you continually borrow. This can lead to increased debt, interest and additional fees, and possibly default if you go too deep. If you’re struggling with debt, it’s time to take a look at your finances and create a plan to pay off your debt once and for all, says Pritchard.
A good place to start is to compare your monthly income and expenses and see if there are any changes you could make that would put you in a better financial position.
Your credit score will be affected
Taking out multiple loans will affect your credit score. Every time you apply for credit, the lender does a thorough investigation, which usually results in a drop – albeit temporary – in your credit score. Also, if you pay late or miss payments altogether, your score will bear the brunt of it, which may limit your ability to obtain other forms of credit on favorable terms.
Be aware of interest and fees
Personal loans tend to have lower interest rates than credit cards; Experian data from 2019 shows that the average interest rate on a personal loan is 9.41%. But your credit score, your debt ratio, and your financial history determine the interest rate you actually get. Also, make sure you understand the terms of your loan, or the length of your repayment period, as well as any fees you may be charged, such as set-up and late payment fees.
It is not a long term solution
Taking out a second personal loan is a temporary solution to a bigger problem, says Weiss.
Using a personal loan to pay off high interest debt, like a credit card, could be a strategically smart move. But that still doesn’t solve the underlying problem that you got into enough debt that you needed another loan to fix the problem. Moreover, this second loan will not be repaid on its own; you will still have to pay.
If you need another loan, it might be time to take a serious look at your finances. It could be your spending habits, an unexpected medical bill, your cost of living, or a combination of factors.
“If you keep taking personal loans and you don’t understand why you need them,” Weiss says, “you’re going to keep going down the rabbit hole.”