Can you have more than one personal loan at a time?
A personal loan can be a useful financial tool to help you achieve your financial goals. While it’s possible to have more than one type of loan at the same time, there are certain considerations that need to be factored in.
Just because you qualify for another loan doesn’t mean you should apply for it. It’s important to carefully evaluate a range of factors when managing multiple loan repayments and their effect on your creditworthiness so you’ll make informed for your long-term financial security.
Loan purpose and necessity
What is the reason for another personal loan? Under certain circumstances, it might make sense, but tread carefully. If it’s to take advantage of a good opportunity that will advance your financial goals, consolidate your debt or simplify your financial management and interest payments and you have enough income to afford it, then it might be an option.
It's vital to take a cautious approach to multiple lending options. If you have to take on additional debt for something, then it might be an indication that you can’t really afford it in the first place.
Don’t take out a new loan for the same purpose as an existing one or take out a second loan to pay an initial one as this could easily put you in a debt spiral. Is there perhaps an alternative lending route, or can you pay off one before taking another? Always weigh the benefits against potential downsides, such as longer repayment terms or higher interest rates.
Evaluate your financial capacity
Before applying for a second or third personal loan, it's important to assess your financial capacity to handle the additional debt. Consider your current income, expenses and financial commitments. Evaluate whether you have enough income to comfortably manage multiple loan payments, as well as your other financial obligations.
Taking on too much debt can have a significant impact on your finances, leading to difficulty meeting your expenses and debt obligations.
How will your credit score be affected?
Your credit score plays an important role in determining the interest rates and terms you will receive on personal loans. Before considering multiple personal loans, have a look at your credit score.
Maintaining a good credit score is important in your loan application because it reflects your creditworthiness and ability to repay debt. Be careful before making multiple loan applications as it will affect your credit score as having higher amounts of debt makes you less appealing to lend to.
Having a lower credit score might also make it more expensive to pay back a loan. Plus, frequent loan application or rejection can raise red flags for lenders and potentially damage your creditworthiness.
Debt-to-income (DTI) ratio
Your DTI ratio is a percentage that represents the portion of your income dedicated to paying off debt, i.e. showing if your income can cover your debt, and how much of your income goes to covering your debt?
If a quarter of your income is going to debt, that means you have a 25% DTI. A higher DTI puts you under increased financial strain (with a higher likelihood of being unable to make repayments), making you less appealing to lend to.
Lenders will evaluate your DTI ratio before approving a loan. Adding another loan will increase your DTI ratio, which may reflect negatively on your ability to manage your debt. This, in turn, not only makes it more difficult to get new loans approved but could put your finances under unnecessary strain if you’re carrying too much debt.
Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).
Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.
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