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Personal loans are growing fast in the United States. The amount owed by Americans in personal loans has almost doubled in four years, according to data compiled by the Chamber of Commerce, to a total of $143 billion.
Some 16% of Americans plan to apply for personal loans to help pay bills and other loans, according to recent data from credit firm TransUnion. People with higher incomes are even more likely to contemplate a personal loan: 21% of Americans with incomes of more than $100,000 are considering one, compared to 14% of those making less than $100,000.
“If you’re facing some debt challenges, you’re not alone,” says Brent Weiss, a certified financial planner at Facet Wealth.
But while many other people may share a similar situation, you should be wary of using personal loans as a way out of debt, especially if you already have one.
Deciding whether to take out a second personal loan depends entirely on your individual situation. But you should never take on more debt than you need, says Weiss.
“Most people hack at the leaves, and they should be hacking at the roots, which is essentially saying that most people are trying to fix the financial challenge they have instead of what’s causing the problem,” says Weiss.
Here’s what you should consider before taking out a second personal loan.
How Many Personal Loans Can You Have at Once?
How many personal loans you can take out will vary across lenders. In most cases, you can have more than one loan at a time, but consider above all whether you can handle additional debt.
You’ll also want to take your financial history, credit score, and monthly income vs. expenses in consideration before applying, because those factors are what lenders look at to determine whether to extend you more credit. Most have minimum requirements related to credit score and income, and they’ll only approve borrowers who meet those.
If you apply for multiple personal loans in a short period of time, lenders could see it as a red flag, especially if any of your applications have been denied. Some lenders have policies about 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 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 more than one personal loan simultaneously, it can seriously affect your credit score and overall financial health — especially if your finances aren’t in good shape.
Anytime you can avoid going even deeper into debt, you should, says Justin Pritchard, a certified financial planner at Approach Financial in Colorado. Instead, try to find better alternatives to borrowing, says Pritchard.
“Try to sell things or temporarily do some extra work. Cutting expenses is also a popular option. None of these are fun options but it’s better than taking on additional debt because that’s additional risk and it can limit your options in the future,” he says.
If you have an emergency fund, you could tap into that, or start building one if the expense can be delayed. You could also look into debt consolidation loans, which clump together your existing loan and any additional credit card debt into a single loan, or a balance transfer credit card.
Many balance transfer credit cards offer an introductory period with a 0% APR on new purchases and transfers for a limited period of time, so you can begin paying off debt without paying interest. However, if you don’t pay off the balance you transferred within the introductory period, you could end up with high interest payments.
Another option is checking with the lender to see if it offers any flexible payment plans. That way you can spread payments over a longer time.
Before applying for a second personal loan, also take the following into consideration.
You Could Fall Deeper Into Debt
If you’re planning to use a personal loan to pay off other debt, the loan itself may be more of a problem than a solution.
You can easily fall into a vicious debt cycle because you are continuously borrowing. That can lead to increased debt, accruing interest and fees, and possibly default if you’re too far deep. If you’re struggling with debt, it’s time to examine your finances and create a plan to pay off your debt once and for all, says Pritchard.
A good place to start is by comparing your monthly income and expenses and seeing if there are any changes you could make that would put you in a better financial situation.
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 hard inquiry, which usually causes a drop — albeit temporary — in your credit score. Additionally, if you pay late or miss payments altogether, your score will bear the brunt of it —which can limit your ability to get other forms of credit at favorable terms.
Be Aware of Interest and Fees
Personal loans tend to come with lower interest rates than credit cards; Experian data from 2019 shows the average interest rate on a personal loan is 9.41%. But your credit score, debt-to-income ratio and 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 could be charged, such as origination and late payment fees.
It’s 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 it still doesn’t fix the underlying issue, which is that you got yourself into enough debt to necessitate another loan to fix the problem. Plus, that second loan won’t pay itself; you’ll still have to pay it off.
If you find yourself needing another loan, it may be time to take a hard 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 don’t understand why you need them,” says Weiss, “you’re going to keep going down the rabbit hole.”