Life is unpredictable. There may be unexpected events beyond your control, which raises the need for finance. Sometimes, some opportunities scream for your attention and need to be seized and capitalize on before someone clutches away from you. Hence, at such times, even though you have taken a personal loan earlier, you may need another such loan. However, there are certain things to keep in mind before opting for multiple personal loans at once.
Here are a few things you should consider before applying for another personal loan:
Loans need to be repaid sooner or later, along with the accrued interest. An additional loan will increase the monthly EMI obligation and make a dent in your savings.
Also, taking multiple loans increases the probability of defaulting on the loan. Hence, the subsequent loan will be offered at a higher interest rate as additional compensation or premium for the greater risk of default.
Let’s keep in mind you are taking an additional risk when you opt for a second loan and the lender is conscious of it. Hence the lender may seek additional documents until the lender is confident that you have the financial wherewithal to repay the loan.
You may find yourself trapped in a perpetual debt cycle. While it may seem a good solution initially to take a second personal loan to deal with your need for finance, you will find that you are perpetually always in a state of debt which doesn't seem to have an end. Hence, it may be wiser to evaluate alternative options if you really need the money for an unavoidable expense.
Nowadays, financial institutions require a certain minimum credit score for an applicant to be eligible for a personal loan. So, in case you have defaulted on repayments earlier or delayed the payment of EMI, taking a loan might not be a viable option as your credit score would have taken a substantial hit. Another downside of opting for multiple loans is the debilitating impact on the credit score. In case you opt for a 2nd personal loan, it will surely shave some points off your credit score. This will undoubtedly make it challenging to apply for a loan next time, or the bank will offer any subsequent loan at a higher interest rate than usual.
Must Read: How to Check CIBIL Score for Personal Loan?
Lastly, look at your assets and liabilities. As obvious as it may sound, it cannot be far away from the truth that your assets must exceed your liabilities. Assets will provide you with that extra cushion in case you’re not able to pay off the EMI from your net monthly income. Also, the financial liabilities will determine your capacity to take loans and repay them.
The ratio between your debt and income plays a crucial role. Typically, if more than 40 per cent of your disposable income goes into servicing your loan, you are rendered unqualified.
There are few alternatives rather than opting for multiple loans at once:
This is the archaic rule, but the most effective: cut down frivolous expenses, re-examine your cost of living and reduce wherever possible and augment savings. It is not really advisable to take on unnecessary debt without a clear idea as to how you will be able to manage your usual expenses in addition to the increased EMIs.
A personal loan balance transfer is the facility provided to a borrower to transfer the outstanding loan amount from one bank to another. This can be a better option, in case you require a top-up, and you are not satisfied by the options being offered by your existing lender . You can opt for a personal loan balance transfer to another lender and negotiate for top-up personal loans. This will provide you with additional credit at competitive rates and avoid the hassle of managing two loans from different lenders.
Personal loan for debt consolidation is a loan taken where all the pre-existing outstanding balances/debts are assimilated and consolidated into one single loan, resulting in a single amount to be paid monthly. Multiple debts are combined and consolidated into one larger debt, with new and favourable payoff terms. Instead of taking a loan for a car, a loan for a wedding, a loan for miscellaneous expenses, you can pay off all the debts by obtaining a personal loan and make one single payment every month as EMIs towards repayment of your personal loan.
Must Read: Types of Personal Loan in India
The primary benefit of a debt consolidation loan is that you don’t have to keep track of different EMIs of multiple loans with varying rates of interest, different repayment tenures, and various features. In the chaos of numerous EMIs, if you miss the payment of a single EMI, your credit score takes a massive hit, your credibility plummets, and it becomes difficult for you to take a loan in the future at affordable rates. Also, multiple EMIs come with the baggage of tedious paperwork and the hassle of maintaining various documents with heaps of paper.
Unlike other financing options, you don’t have to provide any collateral as security to avail any personal loan. You can opt for an instant personal loan at the convenience of your mobile or computer, anytime and anywhere.
Instead of choosing two personal loans, you can opt for an overdraft facility from your lender. This facility will give you a credit limit, but you may have to offer a collateral like a fixed deposit. Against this limit, you can only borrow the amount you need.
Yet another excellent alternative is to avail a loan against securities. This facility, like the overdraft, offers you a limit up to which you can deposit amounts as and when you need. You will have to pledge financial assets like stocks, mutual funds or insurance as a collateral. To know more, please visit Fullerton India’s loan against securities page.
Hence, it’s advisable to look at the alternatives before opting for a second loan. A second loan will come at a higher premium, carve a gaping hole in your savings and adversely affect your credit score. It's befitting if the second loan is taken for an enticing investment opportunity or a stunning idea of business rather than needless luxury and opulence.