Situations can arise where you need to take out a personal loan. You may have to make an unexpected purchase or you may want to consolidate your debt into one payment. But sometimes one loan may not cover your needs, especially if those needs change.
While there isn’t any federal regulation that prohibits how many personal loans or personal lines of credit you can have, some lenders set their own limits. It’s a good idea to understand how many personal loans you can have before you apply—as well as what they can say about your financial wellbeing.
How many personal loans can you have at once?
This is up to the lender. Some will allow two active loans at the same time with a predetermined combined balance. Others will allow you to apply for a second personal loan after you’ve made on-time payments for six consecutive months.
“One reason one might consider taking multiple loans out is if they don't qualify for the full loan amount at one institution,” said certified financial planner Luis F. Rosa, with Build a Better Financial Future LLC in Henderson, Nev. “For example, if a person needs a $10,000 loan but one lending institution is only approving them for $5,000 they might apply at another institution at the same time for two $5,000 loans.”
If you are interested in multiple loans, be sure to shop around for the lowest personal loan rates, and check the personal loan terms. You may find that the bigger challenge is qualifying. Lenders will check your debt-to-income ratio (the percentage of your gross income that goes toward paying debt). If it’s too high, you may not be approved or you may be required to get a cosigner. It’s not the number of loans they’re rejecting; it’s the percentage of your income they demand.
Is it bad to have multiple personal loans?
Having multiple personal loans, especially when they’re taken out within a short amount of time of each other, can negatively affect your credit score, said Rosa. “You're adding two brand new debts, both maxed out at the same time,” he says.
This will raise your debt-to-income ratio, which affects your credit score, too. In addition, lenders may perform a hard credit check during your application process, and that can cause your credit score to go down.
You also have to consider whether you can comfortably make the payments on multiple loans. In today’s uncertain economy, it may be hard to replace income in case of a job loss. Having several loans will increase your financial burden.
And you need to look at your behavior. “If someone is looking to take out multiple personal loans, that may be a sign that they are overextended on their debts,” said Rosa. “There [may be] deeper underlying issues that should be addressed with a financial planner.”
What are the alternatives?
When used responsibly and in moderation, a personal loan could help you reach your financial goals, but it’s not the only option. You could simply say “no” to whatever the money is going to be used for. This is more doable if you were considering a discretionary expense.
Another option is to use a zero-interest credit card. You may qualify for a special introductory rate, which would allow you to borrow money with no interest, which could be a good choice if you can pay it back quickly.
“It might be a better alternative,” he says. “The lender will have more comfort with collateral and with that comes a better interest rate. It's also cleaner with only the one loan versus multiple.”
If you’re taking out a loan to consolidate debt, Rosa recommended doing the "snowball" or "avalanche" method of repaying the debt down as opposed to taking out a personal loan. He suggested using online calculators to determine the best method.
“And you can compare doing one of these methods to consolidating the debt to determine which one saves you more interest and allows you to pay the debt off quicker," he said.