Personal loans are a versatile borrowing tool. They're relatively easy to get, and they can be used for almost anything while offering lower interest rates than credit cards. Plus, they come with a payment plan that lets you know exactly how long you’ll be paying off this debt. Convenient, right?
With plenty of reasons to get a personal loan, you might be considering how to get a loan. But perhaps you already have one or more existing personal loans. If this is the case, how many personal loans can you take out? And is taking out multiple personal loans a good idea?
Can you take out multiple personal loans?
It is possible to take out multiple personal loans, even if you’re still repaying an existing loan. There are not hard-and-fast limits on the number of personal loans you can take out.
That doesn’t mean that you can or should seek to borrow endless personal loans. Even taking on one more loan could have significant downsides to your cash flow, credit, and debt repayment.
Different lenders have different requirements
Existing personal loans don’t automatically mean that you can’t get another loan. But most lenders will look at your current debt when deciding whether to approve you for a new loan.
Some lenders set a limit to how many personal loans you can borrow through them. LendingClub, for example, limits borrowers to two active accounts that cannot exceed a combined balance of $50,000. Online lender Best Egg has similar terms, and also requires that the first loan be open at least six months before you can apply for an additional loan.
Not all personal loan providers have specified limits on taking out multiple personal loans, however. Some may be willing to approve additional loan applications — as long as you can meet their credit or income requirements for personal loans.
The implications for your credit
Before taking out multiple personal loans, consider how this could impact your credit. In some cases, a personal loan could help improve your credit.
Using a loan to pay down credit card balances or other revolving debt can reduce your credit utilization ratio. This measures how much you owe on credit cards relative to credit limits, and is a significant factor used in calculating credit scores. Lower credit utilization is weighed favorably here, which means that personal loans can help build credit if they’re used to pay down credit card balances.
Take this step carefully, however. Any potential benefits are erased if you use personal loans to pay off credit card debt only to again run up those balances — and your credit utilization ratio.
Taking out one personal loan can boost your credit mix if you don’t already have other installment loans listed on your credit report. However, if you already have an installment loan, a new one won’t boost your credit mix.
Multiple personal loans can have other negative effects on your credit, too. Any time you apply for credit, it’s recorded on your credit report as a hard inquiry — which can cause a temporary dip in your credit score.
Your budget and what you can afford
Can you afford to take on another personal loan — and the monthly payments that come with it? If your budget is already stretched thin, adding a new personal loan payment could break it.
You might find yourself scrambling to pay all your bills and at risk of paying late or missing payments altogether. This could hurt your credit, as your payment history is the most important factor used to calculate your credit scores.
Borrowing more money could also push up your debt-to-income ratio (DTI), or how much of your monthly income goes toward the minimum payments on your debt. Lenders look at this number when you apply for a loan to determine if you can reasonably afford to pay it back. Typically, a good debt-to-income ratio is 35% or lower. If your DTI is higher, that could be a sign to you and lenders that it may be unwise to take out an additional personal loan.
Borrowing money isn’t free, either. While personal loan rates are lower than typical credit card rates, you should still weigh this cost. An average rate on a two-year loan is 10.07% as of August 2019, per the Federal Reserve Bank of St. Louis. That translates to $100 in interest paid each year per $1,000 owed, which can add up over the life of the loan.
Many (but not all) personal loans also come with an origination fee of up to 6% of the loan amount. This is rolled into the total personal loan balance, which means you pay it upfront and get charged interest on it.
The importance of a repayment strategy
If you are considering taking out multiple personal loans, it’s essential to know in advance how you’ll pay them all back. Coming up with a personal loan repayment strategy can be the difference between making this debt work for you — or seeing it weigh you down.
Here are some tips to make an informed decision about a personal loan, and ensure you can responsibly repay it:
- Shop for personal loans: Many online lenders will provide rate quotes for a personal loan using a soft credit inquiry. Collect a few to get an idea of the personal loan rates you’re likely to pay and which might be the best personal loan for you. Just make sure the rate quote is generated with a soft credit pull, which won’t affect your credit report or score.
- Project your monthly payments: Figure out how much a new personal loan might add to your monthly expenses. You can use online loan payment calculators, such as this one, to estimate what your monthly payments could be with different personal loan terms.
- Check your budget: Next, take an honest look at how your monthly payments could fit into your existing budget. Review the minimum payments on your existing personal loans and other debt, along with other necessary expenses. This will help you determine if you’ll have a comfortable amount of wiggle room with this new payment added in, or if it cuts a little too close.
What are some alternatives to a personal loan?
Whatever your reasons for seeking out another personal loan, there might be some alternatives that could work for you too. Comparing personal loans to the alternatives can point you to options that could be a better fit — or give you a plan B in case a loan doesn’t pan out.
Open a zero-interest credit cards
One such alternative to a personal loan is opening a new credit card with a 0% introductory APR. With a 0% intro APR credit card, the card issuer typically grants you a certain number of months during which you won’t pay interest on your balance. These grace periods often last 12 months, but some cards offer 0% interest for up to 18 months.
This gives you the chance to finance a large purchase or even transfer a balance from a high-interest credit card, then pay it off without having interest working against you. This option is best for smaller balances that you have the discipline and available funds to pay off during the allotted introductory rate period.
Embrace a side hustle
If you need more money, there are other ways to get it besides borrowing. You could look for ways to earn extra funds with a side hustle.
Fortunately, the gig economy has made earning more money as easy as downloading an app or creating an online profile. You can start delivering for apps like Doordash or Postmates, or driving for rideshare services like Lyft.
For hourly workers, another simple way to earn is to work more at your main hustle. Ask your manager to schedule you for more hours, offer to pick up or cover extra shifts, or volunteer for overtime. Doing so can easily grow your paycheck and could win you points with the boss, too.
Lastly, if you want a more permanent extra income stream, you could ramp up a freelancing hustle or side business. See if you can leverage your skill set to land some contract work to complete in your spare time.
Save up instead of borrowing
You can delay and save for some big purchases, instead of borrowing more personal loans. Vacations or home improvements, for example, are both large expenses that can be anticipated and planned for — including setting up a savings plan. You can even take this route for big life events such as getting married, starting a family, or moving.
In these cases, delaying your purchase could be wiser than taking on more debt. Figure out how much money you’ll need to cover these expenses, and start saving each month to pay for them in cash.
You can even open a high-yield savings account for this goal. This separates savings from “every day” funds, so you’re less likely to spend them. And these funds accrue interest at a much higher savings rate, helping you reach your goals faster.
The bottom line on multiple personal loans
It is possible to take out more personal loans, even if you already have one. While you can get multiple personal loans, however, the more important question is whether you should.
Take an honest inventory of your specific financial situation and needs. Then weigh your unique circumstances against the impacts of taking out another personal loan, and compare that to alternative options as well. As you determine your goals and the risks and benefits of each option, you’ll be better equipped to make an informed decision about taking on a new personal loan.