No matter how much of a forward planner you are, there can be times when your financial needs change seemingly overnight.
Perhaps you’re currently paying off a personal loan you took out to update your kitchen, but you’ve just been hit with some expensive, unexpected vet bills. Or maybe you jumped the gun when taking out a loan for your wedding and forgot to factor in some important costs.
Whatever the circumstances may be, the question you might have is: can I take out a second personal loan?
While the answer to this differs from one lender to the next, in many cases it is possible to have two personal loans at the same time – but that doesn’t necessarily mean it’s your best option.
What should I consider before applying for a second personal loan?
Before you jump straight into comparing and applying for an additional personal loan, it’s important to understand the implications it could have on your finances and decide whether it’s the right choice for you.
Your options may be more limited
When you take out a second personal loan, you may be in a less advantageous financial position than when you took out your first. That’s because when you applied for your first personal loan, you presumably had one less debt than you do now.
This means that your debt-to-income ratio (DTI) is now likely higher. A debt-to-income ratio is the percentage of a borrower’s gross monthly income that goes towards monthly debt repayments.
Borrowers with lower DTI ratios are more likely to have access to more competitive loans than those with higher DTI ratios. The reason being is that banks and lenders see borrowers with higher DTI ratios as being at greater risk of defaulting on their loan.
This generally means that you may not get as good a deal on your second personal loan as you did on your first.
It’s also worth noting that not all lenders will allow you to have more than one personal loan, so you may have to shop around to find one that will.
Your credit score may take a hit
Every loan application you submit will appear on your credit report, which can be accessed by every bank and lender you want to borrow from. Having multiple loan applications recorded on your credit history in close succession is generally not ideal from a lender’s point of view, as it could suggest that you are at risk of getting into a debt cycle.
This may not necessarily be a deal breaker if you have otherwise excellent credit behaviour, such as always making your repayments on time and never defaulting, but it could have an effect on the quality of loans you may be approved for in future.
Of particular importance is if you plan to apply for a much larger loan, such as a home loan, in the not-too-distant future. Consider prioritising this above applying for a second personal loan, if possible, to potentially give yourself a greater chance of accessing the most competitive home loans available.
Your budget may be stretched
Taking on a second personal loan means making an extra repayment each month. Even if you borrow less on your second loan, and your repayments are lower than your first, it could still put a strain on your finances.
As you should before you apply for any financial product, be sure to carefully assess your budget to calculate whether your new loan repayments will fit in comfortably with your existing expenses and liabilities. You might like to make use of RateCity’s Personal Loan Calculator to get a repayment estimate.
Lessening your risk of overborrowing is important in order to protect your credit score and avoid financial strain.
What are the alternatives to taking out another personal loan?
Remember that taking out a second personal loan needn’t be your only or best financing option. Depending on the amount you wish to borrow, the length of time it takes for you to pay it back, along with a number of other factors, there could potentially be an alternative option better suited to you.
Some possible alternatives include:
- Credit card: If the amount you want to borrow is on the smaller end of the scale, then a credit card could potentially be an option for you – just keep in mind that they tend to have higher interest rates than personal loans if you don’t pay it back in full on time.
- Line of credit: Similar to a credit card, a line of credit is a flexible loan with a predetermined borrowing limit that you can access as needed. It is often secured against your property or another large asset. If you’re not sure exactly how much you need to borrow, this could be an accommodating alternative to a loan.
- Overdraft:An overdraft can be accessed through your bank account once all available funds have been used. It provides similar flexibility to a line of credit, but you will typically be charged a fee for every transaction, additional to interest charges.
- Refinance to larger loan: Some banks and lenders may allow you to refinance to a larger loan amount in order to access more money without having to take on a second/separate debt.
Bear in mind that any sort of credit is a serious financial commitment that can take months or years to repay. Consider talking to a financial advisor for information specific to your personal situation.