Your Money: Multiple loans can impact credit score
Personal loans have certainly made it easier for people to access funds in need. While they might be a much-needed lifeline during a financial crisis, borrowers must exercise due caution when it comes to managing multiple loans, especially unsecured loans.
While there are no restrictions on the number of personal loans you can apply for, approval for each new loan will be done based on the lender’s eligibility criteria.
However, taking multiple loans can strain your finances and elevate your debt-to-income ratio, potentially classifying you as a high-risk borrower. For example, if more than 50% of your income is allocated to loan repayments, lenders may hesitate to lend to you. And that’s not all.
Managing multiple loans can have many adverse repercussions that can destabilise your finances. Let’s take a look at some of these and understand how they can affect you financially.
Impact on credit score
Your credit score is crucial to accessing financial credit products. Not only does it influence your eligibility to secure credit but also the interest rate you are offered for loans.
When borrowers take on multiple personal loans and struggle to meet their repayment obligations, their credit score takes a hit.
A low credit score can restrict your access to affordable credit options and even hamper chances of securing a new loan or a credit card.
Interest accumulation
When borrowers have multiple personal loans, the interest accumulation can be substantial. Each loan accrues interest over time, which can accumulate into considerable amounts and add to your debt burden.
If you have to take an additional loan over your existing one, approach your existing lender to request for a lower rate. For your existing loan, see if a balance transfer can help you shift to a lower rate. The idea should be to borrow at a lower cost and repay as quickly as possible.
Missed payments
Each loan comes with its own set of terms, interest rates, and repayment schedules. Managing multiple loans simultaneously can be overwhelming and increases the risk of missing due dates and payments.
This can lead late payment penalties and additional interest charges. In extreme cases, missed payments can lead to loan defaults.
Alternatives to multiple personal loans
Instead of resorting to multiple personal loans, borrowers can explore other options to manage their financial needs. These alternatives include budgeting, creating emergency funds, and seeking low-interest loans from family or friends.
Additionally, they can consider debt consolidation to combine existing loans into a single, more manageable loan with a lower interest rate.
Before taking a loan, borrowers must carefully assess their requirements and repayment capacity. It is also important to understand the long-term financial implications of availing a loan.
The writer is CEO, Bankbazaar.com.