Many Americans have multiple personal loans. Is it a problem?

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Who to turn to if more than one personal loan is weighing you down.

A recent report from The Ascent took a closer look at average household debt in 2020. The wide-ranging study investigated all kinds of consumer debt, from mortgages to car loans and credit cards. He also looked at personal loan debt. And what the study found was surprising.


According to TransUnion’s September 2020 Monthly Industry Snapshot, the average unsecured personal loan debt was $5,538. However, TransUnion also found that many consumers have more than one unsecured personal loan.

A sign of trouble?

If you end up with two personal loans, that’s not necessarily a problem. Maybe you started a home improvement project and before the first loan was fully paid off, took out another loan to put the finishing touches on it.

Like a second automatic payment or a credit card, taking out another personal loan may fit your needs and your budget. However, if any of the following is true, it might be time to revise your strategy.

The first loan was badly spent

Let’s say you borrowed funds to update your kitchen. Shortly after borrowing the money, your car needed repairs or your child decided to get married. If the money you originally borrowed has been diverted to pay for something other than its intended use, taking out a second loan is an expensive way to get back on track. A better idea: wait until the first loan is fully paid off before filling out another loan application, or use the time until you’ve paid off the first loan to save for any project you have planned.

You need a new loan to cover the first

Payday lenders are infamous for charging ridiculous interest rates that prevent borrowers from repaying their loans in full by the due dates. Once borrowers realize they cannot repay a loan in full, it is common for them to take out another loan to cover the first, sinking into a deeper hole.

This practice is not just reserved for payday loans or securities. If on paper it looks like you can afford to repay your loan, you may have qualified for a personal loan from a bank. But if you’re overspending and struggling to repay your loan, it may be tempting to take out another loan to try to make things easier for you. Even if your credit is strong enough to get by, it’s not a good idea.

If you’re having trouble repaying a loan, never borrow more to cover the first obligation. Instead, reconfigure your monthly budget, figure out what you can live without until the loan is paid off in full, and commit to paying off the debt as quickly as possible.

Your debt-to-income (DTI) level is out of whack

If you’re moving full speed ahead and managing your money like a pro, it can be easy to get a loan when you need it. Still, knowing how much you owe versus how much you earn is crucial. This is called your debt ratio. To calculate your DTI, add up your fixed monthly payments and divide that total by your gross income (the amount you earn before deductions).

Lenders ask for proof of income when you apply for a loan because they want to know your DTI. The allowed DTI varies by lender and loan type. However, according to the Consumer Financial Protection Bureau (CFPB), evidence shows that mortgage borrowers with high DTIs tend to have difficulty making their payments.

If taking out a second personal loan increases your DTI, one of two things can happen:

  1. You might have trouble making payments as promised.
  2. You may find it difficult to qualify for another loan if the need arises.

If you have more than one personal loan, but your DTI remains low, you may not be concerned. But if having a second loan on your plate pushes your DTI into an uncomfortable range, it’s time to pay off the debt as quickly as possible. Ultimately, the goal is to make your financial situation as comfortable as possible.

When debt is a problem

If debt keeps you up at night, help is available. Non-profit organizations like the National Foundation for Credit Counseling (NFCC) can connect you with a qualified counselor to help you develop a budget that’s right for you and regain control of your finances.

Personal loans can be a fantastic tool – the perfect way to finance projects that increase the value of your home or to achieve personal goals. Like all financial tools, however, personal loans are most effective when handled with care. Before you bother applying for a personal loan, make sure you have a solid plan.

The Ascent’s Best Personal Loans for 2022

The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.

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