Privacy & Security

Multiple Loans Can Be Risky

Many people today are struggling with debt. The recession that has gripped the country for the past five years has brought with it high unemployment, stagnant wages, and millions of foreclosures. American consumers are now realizing the importance of having a sound financial plan in place which includes living on a budget, saving for retirement, creating an emergency fund, and controlling spending habits.

If you are considering taking on new credit you should be aware of how this can affect your credit score. How you manage your loans is one of the major factors in determining your score. Any time you apply for new credit, lenders will use your credit score to calculate your interest rate and loan terms. The higher your score, the better rates you will receive. This can add up to significant savings if you are financing a car or getting a mortgage for a new home. These types of loans are generally considered beneficial to your credit score. There is much less risk associated with these loans because they are secured loans. If you default on your car loan or mortgage the lender can repossess your vehicle or foreclose on your home to recoup the loss.

Serious financial problems usually begin when you have multiple lines of credit open, such as credit cards and retail store cards. Moderation is a good word to describe what your credit report should show. One or two responsibly managed credit cards sends a positive signal to creditors that you can handle your finances and are not in over your head. Having ten or twelve credit cards open on your report shouts "risk" to any creditor who is considering making you a loan. Even if your balances are low on these cards, the potential is still there that you might decide to max out all of your cards. This is a "red flag" to any new lender that you may be too great of a financial risk.

The truth is you don't even have to be approved for a loan or new credit card for your credit score to take a hit. Applying for a lot of new credit over a short amount of time can also negatively impact your score. Every time you fill out a new credit application, you authorize the lender to access your credit report. The major credit bureaus list on your report every time an inquiry is made. If a new lender sees a lot of inquiries it can be a sign that you are in financial trouble.

Multiple Payday Loans

Payday loans are a different situation altogether. These are short-term loans which are meant to be repaid quickly, usually in just two weeks. Payday loans carry a very high interest rate (400% or more) and are structured so that they should only be used for true financial emergencies such as an unplanned medical expense or unexpected car repair. They are not a solution to long-term debt problems. In fact, they can make a bad financial situation much worse.

However, payday loans are relatively easy to get. A borrower has the option of going to an online payday loan website or an actual local storefront business. Most payday loan lenders do not perform credit checks and most people with some type of income will qualify for a loan. These loans are fast and convenient (the money is in your checking account usually within 24 hours).

But big problems arise if you are unable to repay your loan at the end of the two week repayment period. You will be forced to renew your loan (with additional interest charges and other fees) and that amount will be due in just another two weeks. This cycle of debt can continue for months or even years. Meanwhile you will pay hundreds (or thousands) of dollars in interest charges and fees for a relatively small loan (the average payday loan is $300).

With payday loans being fairly easy to obtain, it's obvious that some borrowers might carry more than one payday loan at a time. This practice poses a really serious financial threat to any borrower. Experts strongly agree that under no circumstances should anyone take out more than one payday loan at a time. And even one is a risky proposition.

Consider carefully before committing to a payday loan. It may be convenient and fast to get a payday loan but the harmful effects on your financial situation can be damaging for years to come.