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Multiple Personal Loans And Your Credit Score
Taking out multiple personal loans can be a complicated choice. Let’s say your car broke down right after you took out a personal loan for your dental work. You’re in a tight spot, and you may find yourself asking, “Can I take out a second personal loan?” Multiple personal loans may be the right choice for you, but it will depend on your current credit history, financial portfolio and debt-to-income ratio. It’s important to be aware of the potential credit score impact from back-to-back loans as you go through the decision process.
What is a personal loan?
A personal loan is an amount of money borrowed from a bank, credit union or another lender that can be used for pretty much anything. Unlike student or auto loans, the money can be used however you’d like. Personal loans are unsecured, meaning you don’t need collateral — you won’t have to put your house or car on the line in case you can’t pay off the loan. This detail can make personal loans more enticing for bad credit borrowers.
You can use a personal loan for covering necessary expenses like emergency medical needs or auto repairs, or for voluntary expenses like weddings or dream vacations. Personal loans can be a great way to build up your credit if you pay the bill on time each month.
These lenders offer multiple personal loans at one time:
When to take out multiple loans
There are a few instances where multiple personal loans are a good idea. If you have high-interest debt, like a credit card debt with 20% interest, you can use a personal loan (with a lower interest rate) to pay it off. In the long run, you’ll likely pay less overall with this method.
Back-to-back loans can also help during an emergency. Say you took out a loan to pay off your credit card, but then you get sick and can’t afford your medical bills. Taking out another personal loan could help you cover those essential expenses.
However, before you forget about the personal loan and credit score relationship, do some research before taking out a second loan. For example, when you have a second loan, your debt-to-income (DTI) ratio goes up — you have more debt and likely the same amount of income. Your DTI can’t be more than 43%, or you won’t get approved for an additional loan.
The interest rate will likely be higher on the second loan. This higher rate is because your debt-to-income ratio is more substantial and your credit score is probably lower. Every time you take out new financing, your credit score lowers for a few months. The number of loans you can take out at once depends on your lender. Some don’t have a limit for the amount you can take out as long as you qualify (with your debt to income, credit score, etc.) Other lenders do have restrictions on multiple loans.
Getting approved for your second loan
You might run into several obstacles when trying to get a second personal loan, like a lower credit score. Check your credit report for errors before applying and dispute anything that’s not correct. Also, try to pay down your debt as much as possible to lower your DTI, which will help you qualify for another loan.
You can sometimes take out a second loan from the same bank but it depends on the lender (you’ll need to call and ask about its policy.) Either way, it’s usually better to use a different lender for your second loan if it offers you a lower interest rate. Keep in mind, you’ll have to manage two payments and separate accounts if you take out a loan from a different bank.
How does taking out multiple loans affect your credit score?
When you apply for a personal loan, your credit score will dip slightly for a few months. This reduction happens because the lender will look at your credit report, which requires a hard inquiry. Don’t worry, your credit score will bounce back.
If you’re applying with multiple lenders, you’ll want to turn in the applications within two weeks of each other. Doing this will tell the credit bureaus that the credit checks were all inquiries for the same product, so the credit bureau counts them as a single hard inquiry.
Also, opening several new accounts at one time might make you appear riskier and you want to look as low-risk as possible to a lender. Getting two or more personal loans at one time makes it seem like you can’t afford your current expenses, which might make lenders wary of handing out more credit to you. Don’t acquire multiple loans too close together, wait a few months for your credit to recover. And keep in mind that if your credit score is lower, you can still get a loan but your interest rate will be higher.
How to build your credit while taking out a loan
The best and easiest way to build your credit while you have multiple personal loans is to make on-time payments. Payments have the most significant impact on your credit score. Even one late payment can haunt you for years, so make sure you pay your bill on time. Also, a personal loan can help you with your credit mix, which also boosts your credit score. If you only have student loans, for example, adding a personal loan can build your credit. Adding too many of the same type of loan, on the other hand, can hurt your credit.
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