Just because you can Getting a second personal loan doesn’t mean you should. Taking out a second one can be disastrous if you are already having trouble managing your debt. Personal loans are the fastest growing form of consumer credit in the United States. Personal loan debt nearly doubled in four years, from $ 72 billion in 2015 to $ 143 billion in early 2019.
Although the reasons for looking for personal loans vary, 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 additional financial burdens associated with a second personal loan and other options available.
You could go deeper into debt
It might be a good idea to repay a high-interest loan and replace it with a second personal loan, but this could easily become a cycle. If you take out personal loans frequently, it is time to check your finances.
Make sure you bring in enough cash each month to pay bills and other important expenses. Cut down on unnecessary expenses and use them for debt instead.
This will affect your credit score
Every time you take out a loan, your credit score is temporarily impacted. Hard inquiries are indicators of uncertainty that could pose a risk to lenders. Taking out additional credit also increases the chance of a missed or late payment, which will also affect your credit score. These hits for your creditworthiness can affect your ability to obtain other types of credit on more favorable terms.
Don’t forget about interest and fees
Although personal loan interest rates tend to be lower than credit cards, be aware that your creditworthiness, debt-to-income ratio, and financial history will determine the interest rate. It is also important to know the terms of your loan and the repayment period. If you exceed this time, additional fees may apply.
It’s a temporary solution
In the end, getting a second personal loan won’t fix any problems. What did you owe you anyway? What’s your solution to get out of debt? A personal credit cycle will not solve any underlying financial problems. You still have to pay back what you owe.
Alternatives to a second personal loan
While you can use a personal loan to fund almost anything, it may not always be your best choice. Here are a few other options to consider.
Balance transfer credit card
Credit transfer credit cards are typically used by borrowers looking 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 0% annual interest for a period of time so you can begin paying off debts without paying interest.
Special savings account
If you can delay the payment and save the money to pay it in full, it may be a better option than taking out a second personal loan. Put money in a separate savings account and use those funds instead of borrowing money.
For outstanding debts, such as: For example, a medical bill or a late utility bill, see if you can work with your provider to create a payment plan. Most of the time, 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 counselor to create a repayment plan and work with creditors and collection agencies to negotiate a lower interest rate. In addition to being offered professional advice such as financial and credit advice and budgeting assistance, you have debt pooled into one monthly payment and are responsible for sticking to your debt management plan.
Reconsider a second personal loan
A growing number of borrowers are turning to personal loans to relieve debt stress, at least temporarily. Before taking this second personal loan, you should consider other options first. Each circumstance is different and you may find that the alternative is cheaper in the end.