Is it okay to have multiple personal loans?

Can you get multiple loans from the same lender?

You may be able to get multiple loans from the same lender. How many personal loans you can have at once from the same lender depends on the lender’s rules and your financial situation.

When you apply for another loan from the same lender, they will look at your credit report and your history with them. This will give an overview of how well you have managed your previous loans. If you’ve made all your payments on time and your financial situation looks stable, they might approve another loan.

However, each lender has its own criteria. Factors such as your income, employment status and existing debt will affect how many loans you can get at once.

A lender’s policies may mean:

• You can get more than one loan if you’ve properly managed your first loan.
• You can increase your existing loan amount to access extra funds.
• Instead of multiple loans, you must end your current loan contract and start a new, larger loan.
• The lender will give you more than one personal loan.
• The lender does not permit having more than one loan or increasing your existing loan amount.

Can having too many loans hurt your credit score?

Having too many loans can hurt your credit score. When you have several loans, your credit utilisation ratio – how much of your available credit you use – can increase. This is an important factor in working out your credit score.

Also, applying for new loans frequently can result in multiple searches on your credit report. These can reduce your score. If a lender does a full check – known as a hard credit check – that can reduce your score by a few points. Some lenders will pre-qualify you using a soft check. This does not impact your credit score.

A healthy credit score helps you get lower interest rates and better terms in future borrowing. It’s wise to monitor your credit score regularly and manage your debts responsibly. You can check your credit score on websites such as:

Having many personal loans could cause you to miss a payment. If you do, you may pay late fees. Payments 30 days late risk being reported to the credit agencies. That could hurt your credit score. Make sure you set up automatic payments, but only if you always have enough money in your account to cover them.

Credit utilisation ratio

The term credit utilisation is used to describe how much of your available credit you are using. It’s important because it can affect your credit score.

If you have a low credit utilisation ratio, this shows lenders that you’re only using a small amount of your available credit. If you have a high credit utilisation rate, this can lower your credit score.

That’s because it suggests that you’re relying on borrowing to make ends meet. This could make it tougher to get new credit, such as a personal loan or mortgage.

The more debt you have, the worse your score may be.

You might have two types of borrowing:

• A £5,000 loan and have paid off half of it
• A credit card limit of £5,000 but you have only spent £500

You have £10,000 of credit available but are only using £3,000. Your credit utilisation ratio is 30%. If you take out a new £5,000 loan, your total available credit is now £15,000 but you are using £8,000 of it. Your credit utilisation ratio is now more than 50%. Anything above 25% may worsen your score.

Debt-to-income ratio

Lenders also look at your debt-to-income ratio. This is how much debt you have compared with your income. If this ratio is too high, it means a lot of your income is going towards paying off debts. Lenders might think it’s risky to give you another loan because you might not be able to pay it back.

For example, let’s say your gross monthly income is £2,000 and you have monthly debt repayments of:

• Personal loan for car: £200
• Personal loan for home improvements: £150
• Personal loan for repair: £100

Add up all your monthly debt payments – in this scenario, that makes £450. Then, divide this total by your gross monthly income: £450/£2,000 gives a debt-to-income ratio of 22.5%.

How much debt is too much?

Building up piles of debt can make it tough to stay on top of your finances. A debt-to-income ratio higher than 40% is likely to be too much debt. Being saddled with lots of debt can affect your ability to get cheap rates on new loans.

It’s important to keep your debt at a level that you can manage easily. Having too much debt puts you at risk of financial difficulties if your circumstances suddenly change. For example, if you lose your job you could struggle to meet repayments.

If you don't make payments on any of your loans, the missed payments will lower your credit score. This could lead to defaulting on the loan and potentially getting a county court judgment (CCJ).

How to manage multiple loans

When juggling multiple loans, you must manage your debts effectively. This may involve coming up with a debt repayment plan. There are several ways you can do this:

Strategies for managing repayments

You’ll need strategies for paying off multiple loans. Here are some ways to manage your money if you’re repaying multiple personal loans:

• You could consolidate your debt into a single loan. This is known as a debt consolidation loan. It means you have one monthly payment instead of several. Start by listing all your debts, and working out how much you have to repay. You take out a new loan, use it to pay off your old debts, and then pay off the new loan. You can find out more about debt consolidation loans on the MoneyHelper website.
• Another option may be a debt management plan. This will also simplify your payments into a single monthly payment. If you’re in financial trouble, you may be able to get one of these plans with the help of a debt charity. For example, try StepChange or National Debtline for more information.
• Debt charities can also provide strategies for keeping on top of your debts. They can help you set up a budget and suggest what’s best based on your personal circumstances.
• You can set up automatic payments so you never miss a repayment. This is particularly useful for maintaining a good credit score and avoiding any fees for missed repayments.

Tips for financial planning

Making ends meet is becoming tougher for most of us as household bills have soared in recent years. Instead of worrying about your finances, doing some simple financial planning can put you back in control. Here are some tips:

1. Start with drawing up a budget. There are plenty of budgeting methods, so it’s about finding one that works for you.
2. You could start with a simple spreadsheet. Write your monthly household income after tax, followed by your main outgoings, such as mortgage or rent, council tax, gas and electricity, broadband and any debt repayments.
3. You can then see what’s left to spend each month on other things and tackle your debts.
4. You may also choose to seek the help of a financial adviser for guidance on saving once you’re on top of your debts.
5. A professional adviser can help you to make a plan for your financial future so you can stay debt-free.

Signs you might have too many loans

Signs you might have too many loans include:

• Struggling to meet your essential living costs
• Using one form of debt to pay off another
• Feeling stressed about your finances
• Your credit score has fallen

How to approach debt responsibly

You can approach your debt responsibly by making sure you don’t take out more loans than you can afford. You should understand the terms of your loans. This includes knowing facts such as the annual percentage rate (APR) and how much your repayments are.

You should always make sure you can afford the repayments before you take out another loan. With secured loans such as mortgages, you risk losing your home if you fail to pay.

Be aware of legal and regulatory requirements that apply to borrowing and debt repayments. This includes understanding your legal rights and responsibilities. For more information on this, go to the Financial Conduct Authority (FCA) website.

Check and monitor your credit score. Take steps to improve your score. Set up automated payments and budget to pay off the most important debts first.

Summary: Multiple personal loans

Making multiple loan applications may be tempting. But it’s essential to consider the impact on your finances and your credit score.

If you’re saddled with a pile of debt, it can be hard to manage your finances. It could also affect your ability to get future credit and negatively affect your life plans.

If pays to take your time before making multiple personal loan applications. If possible, space these out and only borrow the amount you truly need. Remember, too, that there are other types of lending aside from personal loans, such as overdrafts and credit cards.

Make sure you take on the best type of debt for you, and your situation.