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08 Jun
  • Editorial Team
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Today, we live in a world where the options to make our lives easier are limitless. The money to afford them, however, is only limited. And so, we often turn towards another marvel of human ingenuity: financial loans. Nobody can argue against the fact that loans have made our lives so much simpler. However, is taking multiple personal loans really a good idea? There is so much you must consider before going forward, so let’s know more about it.

Affects Personal Finances

Loans are not gifts and need to be repaid sooner or later – along with interest. The loan repayment is bound to impact your personal finances. So while taking another loan, you need to consider following impacts on your personal finances:

  1. Naturally, an additional loan will put an additional burden on your income and savings. The amount you pay as monthly EMIs would increase. This will affect both your savings and your expenditures.

  2. Obviously, taking multiple loans is a risky business, and the lenders would know this. Given that you run at a risk of defaulting on your loan, the interest rate on subsequent loans much higher.

  3. Again, let’s keep in mind that you are taking a risk by taking additional loans and the lender knows it. Thus, they will seek additional documents and longer inquiry, more than the first time, until they are satisfied that you are capable of repaying the loan.

  4. Taking another loan is a good idea if you are opting for debt consolidation. Taking a loan to make a safe investment is also desirable. However, the risk increases if you are taking the second loan for personal expenditure.

Checking Affordability

Even if you are willing to move ahead with another loan despite all the risks, you are no longer in a position to seek the loan amount you desire. The loan you can actually be granted depends on multiple factors:

  1. The ratio between your debt and your income plays an important role here. In most cases, you are not qualified if more than 40 per cent of your income goes into servicing your loan.

  2. The usual way to check affordability is via Affordability assessment. Your credit and your income are factored to see if you are capable of repaying the applied loan.

  3. Of course, the previous loans you took also play a role here. Most lenders would check whether or not you successfully repaid the previous loans, and also the number and amount of previous loans. The more loans you already have, the fewer chances you have of getting a new one.

  4. Like any loan, the interest rate is important here. However, unlike applicants of a fresh loan, you don’t have the same power to bargain. The interest rates would be generally high. The safest option would be to opt for, long-term loans.

  5. Your credit score is always an important factor whenever you apply for a loan. If in case you have a great credit score, lenders would see you as a responsible borrower and might overlook the existing loans you have. It might also help you in getting better interest rates.

Things to Check before Applying

If you are going to apply for another loan, there are some things you must consider before even submitting an application at the bank:

  1. Take a thorough look at your credit score and credit history. In case you have a bad credit score or have defaulted upon repayments in the past, it might not be a good idea to proceed. For once, it would indicate that you struggle with loan repayments. Also, the lender would take it negatively and may give you an undesirable deal.

  2. Your income plays the most important role here. If your income doesn’t comfortably provide you with your expenses, it might be a bad idea to take a loan. You must also take a step back and look at you’re the stability of your job/ business. If there is any factor that might affect your income, you must rethink about taking the second loan.

  3. Income and expenses go hand-in-hand, so you must also take a look at your expenditure. You must detail all the expenses you make in a month and see if you can afford to pay the loan installments too. This is very critical, as failure or delay in paying installment for even a month can severely affect your credit score.

  4. Lastly, take a look at all the assets and liabilities you have. As you can guess, the former must be more while the latter must be less. More assets give you an extra cushion in case you are unable to repay the loan. But if you already have financial liabilities, then taking a loan might not be a good idea.

In conclusion, it would be safe to declare that taking another loan is almost always a risky option. Apart from specific cases, taking multiple loans may put you in danger of defaulting upon payments. However, the points we discussed above will help you decide whether or not you are ready to take another loan.

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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