Just because you can take out a second personal loan doesn’t mean you should. Taking out a second one can be disastrous if you already have trouble managing your debt. Personal loans are the fastest-growing form of consumer lending in the United States. Personal loan debt has almost doubled in four years, from $72 billion in 2015 to $143 billion at the beginning of 2019.
Although reasons differ as to why personal loans are sought out, many Americans choose to use personal loans to pay off other forms of debt such as student loans or credit cards. Here are some of the extra financial pressures that come with a second personal loan and other available options.
You Could Go Deeper into Debt
It might seem like a good idea to pay off one loan that has a high-interest rate and replace it with a second personal loan, but this could easily become a cycle. If you’re frequently taking out personal loans, it’s time to look over your finances.
Make sure you’re bringing in enough money each month to pay bills and other essential expenses. Start cutting back on unnecessary expenditures and instead put that toward any debt.
It Affects Your Credit Score
Every time you take out a loan, your credit score takes a temporary hit. Hard inquiries are indicators of uncertainty, which could be a possibility of risk to lenders. Taking out additional loans also increases the possibility of a missed or late payment, which will also affect your credit score. These hits to your credit score can affect your ability to obtain other forms of credit with more favorable terms.
Don’t Forget Interest and Fees
Although interest rates for personal loans tend to be lower than those for credit cards are, note that your credit score, debt-to-income ratio, and financial history will dictate the interest rate. It’s also important to be aware of the terms of your loan and the repayment period. Going over this time could mean additional fees.
It’s a Temporary Solution
In the end, taking out a second personal loan isn’t going to fix any problems. What put you into debt in the first place? What’s your solution for getting yourself out of debt? A personal loan cycle isn’t going to solve any underlying financial issues. You still need to pay back what you owe.
Alternatives to a Second Personal Loan
Although you can use a personal loan to finance almost anything, it might not always be the best choice. Here are some other options to consider.
Balance Transfer Credit Card
Balance transfer credit cards are typically used by borrowers who want to save money by moving credit card debt with a high interest rate to one with a lower interest rate. Some credit cards may offer a 0% APR for a certain length of time so that you can start to pay off debt without paying interest.
Dedicated Savings Account
If you can delay the payment and save the money to pay in full, that might be a better option than taking out a second personal loan. Put money aside in a separate savings account and use these funds instead of borrowing money.
With some outstanding debt, such as a medical bill or a late utility bill, see if you can work with your provider to set up a payment plan. More often than not, you can pay a minimum amount each month until the balance is paid in full.
Debt Management Plan
Another option is to work with a credit-counseling agency to put together a repayment plan and deal with creditors and collection agencies to negotiate a lower interest rate. Not only are you offered professional advice such as financial and credit counseling and budgeting help, but you’ll have debt rolled into one monthly payment and be held accountable to stick to your debt management plan.
Rethink a Second Personal Loan
A growing number of borrowers are turning to personal loans as a way to relieve the stress of debt, at least temporarily. Before taking out that second personal loan, consider exploring other options first. Each circumstance is different, and you may find that the alternative will be cheaper in the end.