When considering another loan while still owing, there can be both advantages and disadvantages in doing so. Understanding the difference can help with making the right choice and possibly help you avoid financial issues later.
How Many Personal Loans Can You Have at Once?
While you can often have more than one loan from the same lender, there is no limit to how many loans you have in total, but there can be reasons why you might not be approved.
There are some lenders that have policies or requirements before you are able to take out another loan. Some might require several months of on-time payments and others might require that you need to wait 60 days from borrowing again.
The majority of lenders will look at your debt, repayment history, credit score, income and related factors before making a decision about whether you qualify for another loan.
How Multiple Loans Can Affect You
While you can have multiple loans, you should consider whether it’s the right move financially since there can be ways this might affect you.
Before taking another loan while still owing, you should consider the following.
- Your credit score might be affected
- Your debt to income ratio will increase
- Your second loan might have a higher interest rate
- A second loan might can leave you financially fragile
- Are you able to afford making the payments on multiple loans
It’s important to consider your current financial situation and how another loan might affect your credit score and finances. You should look at both sides of the possibilities, and what lenders might not say as well.
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When is Another Loan A Good Idea?
If you are looking at borrowing for the purpose of debt consolidation, this can be one of those moments where taking out an additional loan makes sense.
Debt consolidation is where you would take a loan for the purpose of paying down debt you have with higher interest rates. This can help you to save money and sometimes reduce your monthly payments. This might leave you with a longer payment term and paying more in interest over time, but it can help with making your debt more affordable.
The options available for a debt consolidation loan have a strong connection to your credit score and what kind of loan rates and terms you might be eligible for.
Will Applying for Multiple Loans Hurt My Credit Score?
Having more than one loan shouldn’t hurt your score as long as you are able to make your payments. Each time that you take out a loan, it can cause a temporary dip in your credit score. This will usually recover in a short amount of time.
Having multiple loans can impact your debt to income (DTI) ratio. To explain this simply, it is how much income versus how much debt you have. So when you take out loans, add debt to your credit card or similar, your DTI is affected. This is something that creditors may look at if you were thinking to apply for other forms of credit.
If you had a monthly take home income of $5,000 and were to borrow $1,000 your DTI would be at 20%, assuming there is no other debt. If you had another loan where you still owed $500 and also owed $500 on credit cards, your debt is now $2,000 and your DTI would be 40%. While it depends on the type of loan, lenders often prefer to see DTI of 30-40% or less.
It’s when you become late with payments that you can damage your credit score, and not how many loans you may have. If you are a responsible borrower and make your loan payments on time it is likely to help your credit score over time. Having a good credit mix can help or benefit your overall score as well.
Note that soft inquiries to your credit score do not affect it, and that only a hard inquiry may impact your credit score.
Can I Get Another Loan with Bad Credit?
This will depend on a few factors along with what some lenders may consider when reviewing your request. If your credit score is below 600 it may prove difficult to find an option. If you are not employed and receiving social assistance this can be even more challenging.
It can be difficult to get approved with bad credit, but it isn’t impossible. When trying to get a loan with bad credit you will usually be quoted higher interest rages and have a higher cost of borrowing.
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Your overall debt and income, along with debt to income ratio may influence any decisions for additional loan requests. One of the main things a lender will look at when reviewing your application for another loan is how likely you are to be able to manage your loan payments.