Many Americans have more than one personal loan. Is it a problem?

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A recent report from The Ascent took a closer look at average household debt in 2020. The large-scale study investigated all kinds of consumer debt, from mortgages to car loans and credit cards. He also looked at personal loan debt. And what the study found was surprising.

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According to TransUnion’s September 2020 Monthly Industry Snapshot, the average unsecured personal loan debt was $ 5,538. However, TransUnion has also found that many consumers have more than one unsecured personal loan.

A sign of trouble?

If you end up with two personal loans, that’s not necessarily a problem. Maybe you’ve started a home improvement project, and before the first loan is fully paid off, you’ve taken out another loan to put the finishing touches on it.

Like a second automatic payment or a credit card, taking out another personal loan can fit your needs and budget. However, if any of the following are true, it may be time to reconsider your strategy.

The first loan was badly spent

Let’s say you borrowed money to modernize your kitchen. Soon after you borrowed the money, your car needed repairs or your child decided to get married. If the money you originally borrowed was diverted to pay for something other than what it was intended for, taking out a second loan is an expensive way to get back on track. A better idea: wait until the first loan is fully paid off before filling out another loan application, or use the time until you have paid off the first loan to save for whatever project you have planned.

You need a new loan to cover the first one

Payday lenders are infamous for charging ridiculous interest rates that prevent borrowers from paying off their loans in full when due. Once borrowers realize they can’t repay a loan in full, it’s common for them to take out another loan to cover the first one, sinking into a deeper hole.

This practice is not just reserved for payday or title loans. If on paper it looks like you can afford to pay off your loan, you may have qualified for a personal loan from a bank. But if you’re overspending and having trouble repaying the loan, it may be tempting to take out another loan in an attempt to make things easier. Even if your credit is strong enough to get by, it’s not a good idea.

If you’re having trouble repaying a loan, never borrow more to cover the first obligation. Instead, reconfigure your monthly budget, figure out what you can do without until the loan is fully paid off, and commit to paying off the debt as quickly as possible.

Your Debt / Income Level (DTI) is out of whack

If you fool around and handle money like a pro, it can be easy to get a loan when you need it. Still, it’s crucial to know how much you owe versus what you earn. This is called your debt to income ratio. To calculate your DTI, add up your fixed monthly payments and divide that total by your gross income (the amount you earn before deductions).

Lenders ask for proof of income when you apply for a loan because they want to know your DTI. The eligible DTI varies depending on the lender and the type of loan. However, according to the Consumer Financial Protection Bureau (CFPB), evidence shows that mortgage borrowers with high DTIs tend to have difficulty making their payments.

If taking out a second personal loan increases your DTI, one of two things can happen:

  1. You might have difficulty making payments as promised.
  2. You may have difficulty qualifying for another loan if the need arises.

If you have more than one personal loan, but your DTI remains low, this may not be a problem for you. But if having a second loan on your plate pushes your DTI into an uncomfortable range, it’s time to pay off the debt as quickly as possible. Ultimately, the goal is to make your financial situation as comfortable as possible.

When debt is a problem

If debt keeps you awake at night, help is available. Nonprofits like the National Foundation for Credit Counseling (NFCC) can set you up with a qualified counselor to help you budget that is right for you and take back control of your finances.

Personal loans can be a fantastic tool – the perfect way to finance projects that increase the value of your home or help achieve personal goals. Like all financial tools, however, personal loans are most effective when handled with care. Before you bother to apply for a personal loan, make sure you have a solid plan.


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