Anytime can be an unexpected time for financial events to happen, even after you’ve taken out a personal loan. If you need more money while paying off a current personal loan, is it feasible to get another one?
A personal loan is a useful tool for financing both planned and unforeseen costs. For numerous expenses such as weddings, child education, travel, and medical emergencies, personal loans can be financially life-saving. Even after taking out a personal loan, unforeseen financial events can still happen.
How do lenders treat second loan applicants?
Yes, obtaining a second personal loan is possible. Lenders will evaluate your eligibility similarly to your first loan. Here are some common factors they consider:
- When assessing your ability to repay the loan, lenders will take into account your past employment history, stable income, and work history.
- Having a high credit score shows that you have a history of timely and responsible debt repayment, which makes you a more desirable borrower.
- Your debts are compared to your income using the Debt-to-Income Ratio (DTI). A high DTI ratio typically exceeds 40% and suggests possible difficulties.
- Your history of making on-time loan and debt repayments will be carefully considered by lenders.
Even if you meet the minimum qualifying standards, getting a second personal loan could be more difficult if:
- You already have a significant debt burden.
- You just took out your first loan.
- There are some unfavorable notes on your credit record.
Challenges in getting a second loan
While applying for a second personal loan, you must be willing to consider the following factors.
- Obtaining approval from a lender will be the main challenge. They will evaluate your ability to repay both loans in detail based on your credit score, existing debt, and salary. They might deny your application if they think you won’t be able to handle two loans.
- Obtaining a second loan has the potential to negatively impact your credit score, particularly if it significantly increases your DTI ratio. Future loan qualifying could get harder and more expensive.
Alternative solutions
You may consider the following alternatives if you need some extra amount to furbish your expenses. These include:
- Top-up loan: You might be qualified for a top-up loan if you require additional funds from the same lender that you previously borrowed from. This simplifies the process and might result in a lower interest rate than a new loan by raising the credit limit on your existing personal loan.
- Debt consolidation loan: You may be able to save money and simplify your installment payments by combining multiple loans into a single, lower-interest personal loan. To guarantee you get a better interest rate, you should carefully weigh your options.
Taking on more debt ought to be a carefully thought-out decision. To find the best option, compare terms and rates offered by various lenders. Make sure you can afford the loan repayments for both loans and only borrow as much as you need.
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Frequently Asked Questions (FAQs)
Q. Are there any drawbacks to getting a second personal loan?
There might be a lot of drawbacks even if your application for a second personal loan is approved. Here are a few crucial things to think about.
- An increase in debt load is the biggest risk. Having to manage two loans at the same time can make your monthly spending harder. Make sure your income will cover the additional equivalent monthly amount (EMI) before applying for one.
- Taking out a second loan right away can lower your credit score, even though managing multiple loans wisely can help you raise it over time. It does this by raising your credit utilisation ratio (CUR), which indicates how much of your available credit limit you are using. Your creditworthiness may suffer if your CUR is high.
- Taking out a second loan without managing it well can put you in a debt spiral. If you don’t pay back both loans, you could incur penalties and late fees in addition to further harm to your credit report. This may worsen your financial situation and make it harder for you to get approved for loans in the future.
- If you have a lot of open loans, it will be harder for you to get approved for other credit products like a mortgage or auto loan. Your high debt load may make you appear to lenders like a risky borrower.
- You might be eligible for a higher interest rate on the second loan if the new loan hurts your credit score. This will raise the total cost of borrowing.
ALSO READ: Personal loan rejected? Here’s what to do next to ensure approval in future
Q. Where can I find additional information about second personal loans?
Many banks and lenders publish information regarding personal loans on their websites. Financial advisors and credit counselling firms also provide resources.
Q. Are there limitations regarding the usage of a personal loan?
Certain lenders may impose restrictions on the utilisation of a personal loan. It’s advisable to inquire about any constraints from the lender before proceeding with the loan application.
Q. Are there any prepayment penalties on personal loans?
The existence of a prepayment penalty on a personal loan hinges on the lender and the particular loan agreement. Here’s a breakdown:
Some lenders impose a prepayment penalty if you settle your loan before the end of the loan term. Typically, this penalty amounts to a percentage of the remaining loan balance, such as 2-4% of the outstanding amount.
Nevertheless, certain lenders provide personal loans without any prepayment penalty. This enables you to repay the loan ahead of schedule without incurring extra fees, potentially leading to savings on interest.
The presence of a prepayment penalty, if applicable, will be explicitly outlined in the loan agreement or terms and conditions document. It’s crucial to carefully review these documents before signing. If you have any uncertainties regarding the prepayment penalty, feel free to inquire directly with the lender. They can provide clarification on the specific terms of their personal loans.
Q. What does “Debt Consolidation Loan” mean?
A debt consolidation loan is a new personal loan obtained to repay numerous outstanding obligations. Ideally, this consolidation loan has a lower interest rate than your present loans, allowing you to combine your payments into a single monthly installment.
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Published: 05 Jun 2024, 06:01 PM IST
