Who among us is immune to the occasional big expense? Sure, it’s great when you’re financially prepared to deal with the cost of a big-ticket item or service. But sometimes you’re blindsided by the unexpected: a costly medical procedure, a home repair, a sick pet or your car breaking down.
When your life needs financing, a personal loan (or two or three) can be a quick source of low-interest cash that funds the expected – and the unexpected.
Before you hop online or visit your nearest lender, you should also know that taking out multiple loans can be a risky endeavor. Multiple loans equal multiple loan payments. If keeping up with your payments feels harder by the month, that’s usually a signal that your debt has spiraled out of control.
Can you take out multiple personal loans? The short answer is yes. There is no legal limit to the number of loans you can take out – but are multiple loans a good idea? We’ll tell you when taking out several loans can be a good idea and when you should consider sticking to one.
Taking Out Multiple Personal Loans at the Same Time
Taking out multiple personal loans makes sense when it’s done for the right reasons.
In theory, you can take out multiple personal loans with the same lender. But, ultimately, that’s up to the lender. Some lenders allow borrowers to take out multiple personal loans, while others won’t or set limits on the number of loans a borrower can take out. But you can also take out loans from several lenders at the same time until you have the amount of money you need.
If your lender is okay with multiple loans, find how long you’ll have to wait before you can apply for another loan. Some lenders require you to wait 6 months before applying for a second loan, and others may require you to wait even longer.
What are the requirements for getting multiple personal loans?
Every lender will set their borrower requirements, but lenders generally look at:
- Debt-to-income (DTI) ratio: DTI compares your fixed monthly debt to your monthly pretax income. A high DTI will likely get your loan application rejected, but a DTI of up to 36% can help you qualify for an additional personal loan. Pro tip: If you don’t know what your DTI is, use our debt-to-income calculator to figure it out.
- Income: Your monthly income helps lenders calculate your DTI.
- Credit reports: Your credit reports show lenders how you’ve managed your credit and debt and are used to calculate your credit scores. The higher your credit scores are, the more likely you are to get favorable interest rates.
- Employment history: Lenders use your employment history for identification and to help assess your creditworthiness. If you’ve had a lot of job changes, this might be a red flag for lenders.
- Credit history and obligations: This includes an assessment of public records, including bankruptcies, liens, collections and the number of loans you already have.
Things To Consider Before Taking Out Multiple Personal Loans
You could find yourself in a vicious debt cycle when you take out too many loans at the same time.
Here are some signs that you may be trapped in a debt cycle:
- You’ve missed payment due dates: Having more than one personal loan means more time spent keeping track of different payment due dates. If you’re a fan of snail mail, you’ll have to deal with writing checks and making sure your supply of stamps never runs out. Consider saving some time by setting up automatic payments and letting your bank do all the leg work.
- You’ve devoted most of your earnings to debt: Multiple personal loans will likely eat into a big chunk of every paycheck you earn. If your paycheck is almost exclusively divided between multiple loan payments, that means most of your money isn’t going toward your savings, your retirement, your next vacation – or extra loan payments to save on interest and pay off your loans faster.
- You’ve defaulted on your loans: Any change – like losing your job, missing one payment or dealing with an emergency – can interrupt your loan payments. Once late fees start piling on, it can speed up the debt cycle.
- You’ve increased your DTI: Every time you take out a loan, the debt side of your debt-to-income (DTI) ratio gets bigger. A high DTI makes it harder to take out a loan. And even if you get approved for one, it will likely have a higher interest rate.
- You’ve dramatically lowered your credit score: Each time you apply for a loan, a lender checks your credit. Every hard pull on your credit report can drop your credit score by 5 points unless you apply for the same type of loan within about 14 days of each other.
- You’re paying more: If you take out personal loans with variable interest rates, your monthly payment can increase when the federal funds rate goes up.
A debt cycle is triggered when you borrow more money than you make or borrow money to afford your monthly expenses.
When Taking Out Multiple Loans May Make Sense
You may need to take out another loan if the amount you received with the one loan doesn’t meet your needs.
For example, a costly medical procedure may require additional services like therapy or follow-up visits. An additional loan might make sense in this scenario because it’s an investment in yourself. And some health expenses are tax deductible, too.
A second personal loan might make sense if it’s used for business, taxable investments or qualified higher education expenses. Investments in these three categories could theoretically help you to generate more future income. If you use a personal loan for investments, you might be able to deduct the interest from your taxes.
If you plan on borrowing money again, your most important consideration should be your current budget. If you can’t afford another bill, it may make more sense to exhaust other options rather than get trapped inside a debt cycle.
How To Properly Manage Multiple Personal Loans
You can manage multiple personal loans using a variety of tools and resources. Help prevent missing payment due dates by:
- Setting up autopay: Set up automatic payments through your bank so you never miss a payment.
- Create calendar reminders: Set up a calendar alert to remind you when your payments are due. If you mail in your payments, set your alerts 10 days in advance, giving your payments ample time to work their way through the mail to your lender.
- Activate eBill reminders: Some banks can receive an eBill (electronic bill) from a lender. The eBill will create an alert on your online banking account to remind you that a payment is due.
Alternatives to Multiple Personal Loans
Multiple personal loans won’t work for some of us. Maybe you need the money fast and can’t wait out a lender’s waiting period to take out a loan. Maybe you’d rather not go through the application process again.
Whatever your reason(s), we have a few alternatives for you to consider when you need to cover costs of your project or situation:
- 0% APR credit card: You can use a credit card with a 0% APR to pay for a project or unexpected cost. If you completely pay off the balance on the card before the 0% introductory term is up, you won’t have to worry about the balance accruing interest.
- Dedicated savings account: Plan for an expected expense by opening a dedicated savings account. You can regularly deposit money into the account or transfer money from your checking into your dedicated savings account. With the money stashed away in your dedicated account, you’ll be less tempted to spend it on your day-to-day needs.
- Home equity loan or home equity line of credit (HELOC): If you’re a homeowner and your home has a significant amount of equity in it, you may want to consider a home equity loan or HELOC. There are fees involved with the application process, but the interest rates tend to be lower than personal loans or cash advances.
- Credit card cash advance: With a cash advance, you borrow money against your card’s line of credit. Besides the one-time transaction fee you’ll pay for the advance, the interest rate on the advance will likely be higher than your card’s purchase rate. Cash advances are very expensive and should only be used as a last resort.
Be Smart About Borrowing
There are lots of reasons why you may need to take out multiple loans. While there is no rule against taking out multiple loans – that doesn’t mean it’s always a good idea.
Weigh your second or third loan against its potential impact on your finances, your debt and your future financial goals. If you can’t manage your debt, you’ll risk drowning in it. So consider alternatives that can help avoid the debt cycle.