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How Many Personal Loans Can You Have at Once?

| Money Rates Columnist
min read

couple-getting-loan-happyWhen it comes to personal loans, many lenders will allow you to go to the well more than once. There's no formal limit regarding the number of personal loans you can take out. There are practical barriers, however. Factors such as credit scores and your debt-to-income (DTI) ratio limit both how many loans you can take out as well as the amounts available to you.

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How Many Personal Loans Can You Have at Once?

Many lenders - but not all - are entirely okay with borrowers who seek a second or third personal loan. The reason is that personal loans tend to be smaller than auto debt, student loans, credit card balances, and mortgages. If you have a $10,000 personal loan and now want a $7,500 personal loan, the total is only $17,500. Even though there are two loans their combined value is not especially high.

From the lender's point of view, the real issue is the borrower's ability to handle credit. Lenders look at the individual's debt-to-income ratio and credit standing to determine how much lending is appropriate.

What Is a Personal Loan?

A personal loan is generally an example of short-term financing. For instance, imagine that you borrow $5,000 at 10% interest over four years. The monthly payment for principal and interest will be $106.24. After 48 payments the debt and all required interest are fully paid.

Related: What Is a Personal Loan, Unsecured Loan or Signature Loan?

The Debt-to-Income Ratio (DTI)

The debt-to-income ratio standard compares your gross (before tax) monthly income to your monthly recurring debts. "Recurring debts" include such things as monthly payments for auto loans, student debt, minimum credit card payments, and housing costs such as rent or monthly mortgage payments - not costs like food or utilities.

Personal loans are influenced by DTIs. In turn, personal loans also impact DTI ratios.

Debt-to-income ratios affect your ability to apply for a personal loan. If you have a gross monthly income of $8,000 and your new loan payment plus your rent and recurring debts equal $3,350, your DTI ratio is 41.9% ($3,500 / $8,000). This is less than 43%, a level many lenders will accept. If your DTI hits 44%, many lenders would turn down the loan or offer a lower loan amount.

Now, suppose that you borrow $5,000 over four years at 10% interest. The monthly payment is $106.24. Because a personal loan payment is a recurring debt, it counts in your DTI. If you apply for a second personal loan, the new lender adds that payment to your DTI as well as the first loan, which has not yet been paid off.

It doesn't matter that the new loan is a personal loan. This is the same situation as a borrower would have with automobile financing. If the borrower has one outstanding car loan, that monthly payment counts in the lender's DTI calculation. If the borrower has two outstanding car loans, both would be used to determine the DTI.

While some lenders might accept a loan application with a DTI at 43% or higher, others might not. This is why it's important to shop around for the best personal loan rates and terms.

Multiple Personal Loans and Your FICO Score

Personal loans - like any form of debt - can harm or help a FICO credit score as well as credit scores from other providers. Here's how.

First, each application you make for a personal loan is a "hard" credit inquiry - meaning a credit check for an application for credit. A hard credit inquiry can temporarily reduce your score by a few points. Credit scoring systems bundle like inquiries for such things as mortgages and auto loans made in a period from 14 to 45 days. However, hard inquiries for personal loans are nearly always treated as separate inquiries, depending on the scoring system.

Second, each personal loan is a separate account. There is a "sweet spot" that credit scoring systems prefer in terms of the number of accounts you have. You need at least two to generate a credit score, and having a good mix of credit helps systems predict how you manage debt. So if you have few accounts, another personal loan could improve your credit score.

But one of the most common "reason codes" FICO gives for lower credit scores is either "too many accounts" or "too many accounts with balances." If you're concerned about the number of accounts you have, a personal loan refinance (for a larger loan) might be a better choice.

Third, getting multiple accounts mean you're adding debt to your credit profile. Generally, less debt is better.

Fourth, getting a new personal loan reduces the average account age. Older account averages are better because they suggest more stability.

Fifth, if you get a new personal loan to pay off multiple small debts, you will reduce your number of accounts. That's a plus.

Related: Personal Loans vs Credit Cards

How to Apply for Additional Personal Loans

If you have one personal loan, you know how to apply for a personal loan. The process does not change just because you want additional loans! You can get personal loans from banks, credit unions, friends, and family. Commercial lenders are likely to ask for such things as tax returns, W-2s and permission to pull credit reports. Friends and family may have different standards, but in all cases the expectation of repayment is the same.

New Personal Loan From Your Current Lender

If you now have a personal loan with a lender, it can make a lot of sense to apply for additional financing. Your chance of success is better if you have a good repayment record. The reason is that you already have an established relationship and they have experience with your finances - you're a known quantity.

Refinancing Your Personal Loan With a Bigger Loan

In some cases, you may want to replace an existing personal loan with a new and larger one. A personal loan refinance ends your current personal loan and also provides extra cash. Such a refinance can be especially attractive if you get a new loan at a lower rate than your old one. If not, apply for a personal loan in addition to the one you already have. It's cheaper.

Related: Personal Loan Interest Rates (How to Pay Less)

Alternatives to Multiple Personal Loans

If you want financing have real estate equity from your home, you might want a second mortgage or a home equity line of credit (HELOC). Unlike a personal loan, a second mortgage and a HELOC are secured forms of financing - your home is collateral for the debt. For this reason, these loans usually come with lower interest rates. Although the setup costs can be higher, so they are usually more appropriate for larger loan amounts.

Another option is to get a loan from your 401(k) retirement account. This can be complicated, so speak with your account representative for details.

A zero-interest or balance transfer credit card can be used to refinance a personal loan. However, while credit card options can be alluring, once zero-interest periods end, credit card interest rates can be steep. According to the Federal Reserve, the typical credit card holder paid 16.88% as of this writing. For this reason balances should be paid down to zero as quickly as possible.

Lastly, if you want new financing because debt consolidation has not worked for you, speak with a non-profit credit counseling service such as the National Foundation for Credit Counseling.

How to Find the Best Personal Loan

Personal loans have different terms and costs. To find the best personal loan, speak with banks and credit unions. Personal loans are also available from friends and family. When working with friends and family be aware of the relationship and personal issues that may arise, in addition to financial terms.

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