Most people borrow money with every intention of paying it back. But life circumstances sometimes intervene and make that difficult or impossible. The repercussions of defaulting on a personal loan will differ depending on the type of loan—secured vs. unsecured—and other factors. Here is what you need to know.
Navigating the world of personal loans can be tricky especially if you already have outstanding debt. The question of whether you can get a loan if you owe a loan is a common one and the answer depends on a variety of factors.
In this comprehensive guide we’ll delve into the intricacies of personal loans and debt management equipping you with the knowledge you need to make informed decisions about your financial future.
Understanding Personal Loans and Debt
Before we get into the details of obtaining a loan while having debt, let’s define some important terms to lay a strong foundation:
Personal Loan: A personal loan is a type of unsecured loan that you can use for various purposes such as debt consolidation, home improvement, or unexpected expenses. Unlike secured loans, personal loans don’t require collateral, making them accessible to a wider range of borrowers.
Debt: Debt refers to any money you owe to a creditor, such as a credit card company, bank, or government agency. Debt can be secured or unsecured, depending on whether it’s backed by collateral.
Debt-to-Income Ratio (DTI): An important metric for assessing your creditworthiness is your DTI ratio. It determines the portion of your monthly gross income that is allocated to debt repayment. Due to their higher capacity to handle further debt, borrowers with low debt-to-income ratios are usually preferred by lenders.
Credit Score: Based on your payment history and credit history, your credit score is a numerical indicator of your creditworthiness. Credit scores are used by lenders to evaluate the risk of lending you money and to calculate the interest rate you will pay.
Now, let’s address the central question:
Can You Get a Loan If You Owe a Loan?
The short answer is that you can obtain a loan even if you already have one. However, it’s not always straightforward and depends on several factors, including:
- Your DTI ratio: Lenders are more likely to approve loans for borrowers with low DTI ratios, indicating a greater capacity to manage additional debt. If you already have significant debt, adding another loan could push your DTI ratio too high, making it difficult to qualify.
- Your credit score: Your credit score is a crucial factor in determining your interest rate and loan terms. A high credit score indicates a lower risk to lenders, making it more likely for you to qualify for favorable terms.
- The lender’s policies: Different lenders have varying policies regarding debt and creditworthiness. Some lenders may be more lenient towards borrowers with existing debt, while others may have stricter requirements.
- The purpose of the loan: Lenders may be more willing to approve loans for specific purposes, such as debt consolidation, which can help you manage your existing debt more effectively.
Tips for Getting a Loan If You Owe a Loan
If you’re considering getting a loan with existing debt, here are some tips to improve your chances of approval:
- Improve your credit score: Focus on paying down existing debt and making timely payments on all your bills. Consider using a credit monitoring service to track your progress and identify areas for improvement.
- Reduce your DTI ratio: Pay down existing debt or increase your income to lower your DTI ratio. This will make you a more attractive borrower to lenders.
- Shop around for lenders: Compare loan offers from different lenders to find the best terms and interest rates. Consider online lenders, credit unions, and traditional banks to explore your options.
- Be upfront about your debt: When applying for a loan, be honest about your existing debt and explain how the new loan will help you manage your finances more effectively.
Alternatives to Personal Loans
If you’re struggling to qualify for a personal loan due to existing debt, consider exploring alternative options:
- Debt consolidation: Consolidating your debt into a single loan with a lower interest rate can simplify your payments and potentially save you money.
- Credit card balance transfer: Transferring your credit card balances to a card with a lower interest rate can help you pay down your debt faster and save on interest charges.
- Home equity loan or line of credit: If you own a home, you may be able to access its equity through a home equity loan or line of credit. These options typically offer lower interest rates than personal loans, but they come with the risk of losing your home if you default on the loan.
- Personal line of credit: A personal line of credit provides access to a revolving credit line that you can use as needed. This option can be helpful for managing unexpected expenses or ongoing financial needs.
Remember, the best option for you will depend on your individual circumstances and financial goals.
Getting a loan with existing debt requires careful consideration and planning. By understanding the factors that influence your approval chances and exploring alternative options, you can make informed decisions about managing your debt and achieving your financial objectives.
What Happens When You Miss a Personal Loan Payment?
Depending on how many days have gone by since the payment was due, you can anticipate a number of things happening if you miss a personal loan payment. Here is a typical timeline.
Defaulting on a Secured Loan
If collateral was used to secure your personal loan, you should anticipate that after a few missed payments, your lender will attempt to reclaim the collateral. Be aware that in certain cases of repossession, your lender may not have to give you advance notice or obtain a court order. This scenario is more common with auto loans than secured personal loans. However, it can also happen when you use a car title as collateral for a personal loan.
Some secured personal loans use cash in a connected savings account or certificate of deposit (CD) as collateral. In the case of failure to repay, the bank could keep that money to satisfy the loan.
In either case, your credit score could still be impacted if you lose your collateral as a result of nonpayment. Your late payments and delinquency will continue to be reflected on your credit reports.
Can I get a mortgage if I owe federal tax debt to the IRS?
Can I get a new personal loan if I owe money?
You’d need to get approved for that additional personal loan, though, which may be challenging if you already owe money. Approval rests on a variety of factors, including your income, credit score, and debt-to-income (DTI) ratio.
Should I get a personal loan?
Borrowing multiple personal loans can make sense if you can afford repayment. You can use a personal loan for almost any purpose and pay it back over several years, usually at a fixed interest rate. A personal loan can also be a useful tool for consolidating high-interest debt if you qualify for a competitive rate.
Can I take out another personal loan?
Taking out an additional personal loan is a possible scenario, but it may not be the right decision for you. There’s no limit on how many personal loans you can have at once, but there are some requirements and restrictions. It’s important to consider if you are able to successfully handle the financial risk of taking out another personal loan.
Can I borrow more than one loan at a time?
Whereas SoFi and Prosper allow you to borrow up to two loans at once. Other lenders, like LendingClub, don’t set a limit on how many you can borrow. Even if a lender does allow you to take out more than one loan, it may not let you borrow more than a certain aggregate amount.