THE ADVANTAGES AND DISADVANTAGES OF TAKING MULTIPLE LOANS AT ONCE

Introduction

With an increased number of financial institutions offering funds to eligible individuals, getting loans has become much easier than before. Be it for personal expenses or business purposes, loans are increasingly becoming the way out for many financial needs. Many a time, the easy, quick and hassle-free disbursal of loans makes us opt for different types of loans for different purposes. Taking multiple loans can be beneficial if you can manage the repayments; however, a couple of defaults can get you trapped in a long-term debt crisis. Today, let us talk about the advantages and disadvantages of taking multiple loans so that you can make an informed decision.
 

Why take multiple loans at once?

There could be several reasons why people go for multiple loans. The income and repayment capacity has grown over the years and now people don’t hesitate to take separate loans for different needs—such as, say, one for buying a house and another for a car or a personal loan to fund a foreign trip. Availability of different and flexible sources of credit also serves business purposes. However, just because another loan is available and you are eligible for it doesn’t mean you should take it. We are listing the reasons to opt /avoid going for multiple loans.

When to take multiple loans?

 
Multiple loans are not always an option. In certain cases, they are essential. If you are wondering why to opt for multiple loans, here are some situations where they may be a saviour.

 

• Business emergency

You may have taken a loan a few days back to cover personal expenses, but your business now requires funds to cover operational costs. Even if you have taken a personal loan, you may be forced to apply for another loan—a business loan—in this situation.
 

• Medical emergency

Medical emergencies are unpredictable and sometimes, you may not be financially prepared to cope with such a situation. If you are searching for reasons for why to opt for multiple loans, then given the escalating expense of healthcare in India, regardless of how many loans you have already taken, you may get forced to apply for more.
 

• Debt consolidation

If you have just started your career and due to your insufficient credit history, a lender may grant you a high-interest loan. One of the greatest advantages to take multiple loans is that sometimes it frees you up from a high-interest debt burden. Applying for a low-interest personal loan at the later stage of your career helps in debt consolidation. 
 

• Higher education

There are times when, in addition to meeting your personal needs, you may require a loan to send your child abroad for further study. In such circumstances, you will need to apply for multiple loans such as an education loan to cover the costs of college fees, accommodation costs, and other expenses.
 
Also Read: 8 Reasons Why LAP is a Better Choice to Fund Your Kid’s Education
 

• Other emergencies

In addition to the aforementioned emergencies, you may need to apply for multiple loans to cover wedding-related expenses, house renovations, and the replacement of an irreparably damaged vehicle, among other things.
 

Various advantages of taking multiple loans

 

• Credit flexibility

As mentioned above, the quick and easy disbursal of loans means you have access to funds that you can use the way you want. This immediate access to multiple lines of credit gives flexibility in phases of a financial crisis.
 

• Improves credit score

Both individuals and companies know the value of good credit history to get loans at favourable terms. Improving credit score on a single loan can be a long and arduous process. However, if you manage to repay all instalments for multiple loans within the deadline, your credit score will soar above briskly.
 

• Safety net

Having different sources of funding at the same time provides a sense of financial security as one becomes assured that additional money will come in no time if needed.
 

• Fulfil multiple dreams

With multiple loans, you don’t have to postpone one dream for another. For example, you can buy both your home and car with two separate loans instead of prioritising one over the other.
 

Various disadvantages of taking multiple loans

 

• EMI load

More loans mean more EMIs and with most of your income going in paying EMIs and regular monthly expenses, you will have very little left for savings and investments.
 

• Psychological pressure

Living under the burden of debt is never easy and multiple loans just add on the psychological pressure where the borrower constantly stresses about how to repay the loan or make some savings. 
 

• Paying more

With each loan, you pay more in the form of interest money. So, when you calculate the money repaid to lenders for different loans, it will come out to be a much larger sum than what you had collectively borrowed.
 

• Negatively affect future credibility

With multiple EMIs comes the bigger risk of defaulting. Missing EMIs can adversely hit your financial goals. Not only lenders will levy a penalty charge on you, but your credit score will also take a hit. This will directly affect your future loan credibility.
 

• High debt-to-income ratio

Running multiple loans increases your debt-to-income ratio. When a lender notices that more of your income is going toward debt repayment, they will hesitate in offering loan top-ups, balance transfers, and other similar services.
  

How to manage multiple loans ?

 

1. Firstly, analyse if you genuinely need the loan. Loans should always be taken according to the need and requirements of an individual.

1. Then, see if you are financially strong enough to bear the burden of three or four loans at one time.
2. Thirdly, always research and opt for those loans that give you a better rate and tenure terms.
3. If you obtain additional funds through investment, or a festive bonus at work, or a rise in income, use them to increase your EMI or pay an increased EMI in the month when you have extra funds at your disposal.
4. Lastly, opt for comfortable smaller EMIs and pay all of them without delay and constantly keep an eye on your credit. At times, the multiple loans that once served you well can appear to be a burden. In these situations, you can opt for refinancing (switching to loans with better terms) or debt consolidation (clubbing all loans into one). If things are going out of hand, you can approach a credit counselling service for better debt management. 

 
You must always think twice before borrowing money. In some cases, having multiple loans fits the bill perfectly where the borrower is confident about repaying multiple EMIs. In many other cases, one emergency can lead to delay or default. Sometimes, people take another loan to repay the existing loans and thus, get trapped in a vicious debt cycle. However, if at any time, you find it difficult to manage numerous loans, there are ways out as mentioned above. One must know all the options available whether while taking several loans or getting out of the debt cycle. Now that you are aware of the pros and cons of multiple loans, hope you will be able to manage your loans better.
 
Disclaimer: This post was first published on 30 April 2019 and has been updated for the latest information, freshness, and accuracy.