Personal loans are growing rapidly in the United States. The amount that Americans owe in personal loans has nearly doubled to a total of $ 143 billion in four years, according to the Chamber of Commerce.
According to the latest data from the credit firm TransUnion, about 16% of Americans plan to apply for personal loans to pay bills and other loans. People with higher incomes are even more likely to consider a personal loan: 21% of Americans with incomes greater than $ 100,000 will consider one, compared to 14% of those who earn less than $ 100,000.
“When you face debt problems, you are not alone,” said Brent Weiss, Certified Financial Planner at Facet Wealth.
But while many other people face a similar situation, you should be careful about using personal loans as a way out of debt, especially if you already have one.
The decision to take out a second personal loan depends entirely on your individual situation. But you should never get into more debt than you need, says Weiss.
“Most people chop the leaves and they should chop the roots, which essentially means that most people are trying to solve the financial challenges they are facing rather than creating the problem,” Weiss says.
You should consider this before taking out a second personal loan.
How many personal loans can you have at the same time?
How much personal loans you can take out varies from lender to lender. In most cases, you can have multiple loans at the same time, but the most important thing to consider is whether you can handle additional debt.
You should also consider your financial history, creditworthiness, and monthly income compared to your expenses before submitting an application as lenders will consider these factors in deciding whether to give you more credit. Most have minimum credit and income requirements, and they will only approve borrowers who meet them.
If you are applying 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 guidelines for borrowers applying for multiple personal loans.
For example, SoFi requires borrowers with one or more existing personal loans to have made at least three on-time payments for each loan in order to be eligible for another personal loan.
4 things to know before getting a second personal loan
While you can get more than one personal loan at a time, it can seriously affect your creditworthiness and overall financial health – especially if your finances are in bad shape.
Anytime you can avoid getting even deeper into debt, do so, says Justin Pritchard, certified financial planner with Approach Financial in Colorado. Instead, try to find better borrowing alternatives, says Pritchard.
“Try selling things or doing extra work temporarily. Cost savings are also a popular option. Neither of these options is fun, but it is better than taking on additional debt as it adds risk and can limit your options in the future, ”he says.
If you have an emergency fund, you can tap into it or start building a fund if spending can be delayed. You can also consider debt consolidation loans, which combine your existing loan and any additional credit card debt into a single loan or a credit transfer credit card.
Many transfer credit cards offer an introductory period with an APR of 0% for new purchases and transfers for a limited period of time, so you can begin paying off your debt without paying interest. However, if you do not pay off the transferred balance within the introductory period, high interest payments may be due.
Another option is to check with the lender to see if they offer flexible payment plans. This allows you to spread payments over a longer period of time.
Also, consider the following before applying for a second personal loan.
You could get deeper into debt
If you are planning on using a personal loan to pay off other debts, the loan itself can be more of a problem than a solution.
You can easily get into a vicious cycle of debt from borrowing all the time. That can lead to increased debt, accrued interest and fees, and possible default if you get too low. When you’re struggling with debt, it’s time to review your finances and come up with 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 you could make changes 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 a loan, the lender puts out a tough query that usually results in a – albeit temporary – decline in your credit score. Also, if you’re late in paying or skipping payments entirely, your scores will bear the brunt of the burden – which can limit your ability to get other forms of credit on favorable terms.
Watch out for interest and fees
Personal loans usually come with 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 creditworthiness, debt-to-income ratio, and financial history will all determine the interest rate you will actually get. Also, make sure you know the terms of your loan or the length of your repayment period, as well as any fees that you might be charged, such as:
It’s not a long-term solution
Getting a second personal loan is a temporary solution to a bigger problem, Weiss says.
Using a personal loan to pay off high-yield debt, like a credit card, could be a strategically smart move. But it still doesn’t fix the underlying problem, which is that you are in enough debt to need another loan to fix the problem. In addition, this second loan does not pay off by itself; you still have to pay it off.
When you find that you need another loan, it may be time to take a closer 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 out personal loans and you don’t understand why you need them,” says Weiss, “you’ll go further down the rabbit hole.”