What is loan stacking?

Learn the risks of loan stacking and compare suitable alternatives to find the best fit for you.

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Loan stacking is a risky borrowing practice that involves taking out multiple loans at one time. Borrowers often turn to loan stacking when they’re unable to qualify for the amount of money they need from one lender.

While taking out multiple loans can seem tempting, there are many reasons why you should avoid it. This post dives into the risks associated with loan stacking and suggests some suitable alternatives you can explore to get your hands on the money you need.

What is loan stacking?

Loan stacking happens when borrowers take out multiple loans from different lenders at the same time. These loans tend to have similar characteristics and repayment terms, and they are typically used to “stack” funding if a borrower can’t qualify for the full amount they need from a single lender.

This might be because their income isn’t high enough or they already have a high debt load. Or maybe they have bad credit and are seen as more likely to default. Whatever the reason, when a borrower decides to take out several loans at the same time, it can have disastrous financial consequences for them and their lenders.

Example of loan stacking

If you’re still not quite sure what loan stacking is, we’ll give you a quick example.
Let’s say you need $40,000 to pay for home renovations and you’ve already hired the contractors (and received their invoices). You apply for a loan through your bank but are only able to qualify for $20,000.

In order to get more money, you apply for a second $20,000 loan with an online lender. They see the same credit report as your bank and are unaware that you recently borrowed money. You get a loan from them as well – and now you have two $20,000 loans to pay back.

So what’s the problem with this approach? Well, a lender will usually only give you an amount of money that you can reasonably pay back. This means if you’ve received a smaller loan than you anticipated, it’s probably because you can’t afford the full amount. And if you make up the difference by taking out additional loans, it could put your financial situation at risk.

What are the risks of stacking a loan on top of an ongoing similar loan?

  • Higher risk of default. You might not have enough money to pay back the amount you borrow, which could lead to you defaulting on your payments.
  • Violation of loan terms. If a lender finds out that you’ve stacked your loan, they may demand repayment of the whole amount immediately.
  • Loss of loan insurance. You might not be eligible to claim any money back on loan insurance if you’ve taken out more than one loan in a short time frame.
  • More debts to manage. You’ll end up with different payment amounts due on different dates, which can become difficult to manage.
  • Harder to get future loans. It could be difficult to get future loans if a lender sees that you’ve taken out loans in quick succession previously.
  • Lower credit score. Your credit score could end up taking a hit if multiple lenders perform hard credit checks on your account in a short amount of time.

How are legitimate borrowers suffering from loan stacking?

Loan stacking can cause the following problems for legitimate borrowers:

  • More difficult to qualify. It can be harder for legitimate borrowers with bad credit to qualify for loans since lenders don’t want to take on additional risk.
  • Higher lending standards. Lenders are forced to make their lending practices more strict – which can mean less money and more rigid repayment terms for borrowers.
  • Targeting by fraudulent lenders. Once you obtain a loan from one lender, you may be targeted with calls from fraudulent lenders offering low interest rates on a second loan.

What are my alternative options?

Loan stacking is a risky practice that you should avoid. The following are alternative options that could be a better fit for your particular financial situation:

  • Ask for more money from your lender. You may be able to negotiate a better deal with your lender if you have a long history of banking with them.
  • Refinance your loan. Try paying down your first loan significantly, then take out a second loan to pay off the first and keep whatever money remains.
  • Use complementary financing options. A low-interest credit card or line of credit could help you pad your loan without carrying the same level of risk as loan stacking.
  • Borrow from loved ones. You could ask friends or family to float you some cash if you need money on top of your loan.
  • Build up your credit score. If your credit score is below 650, you may need to rebuild it before you can qualify for the amount you need.

Bottom line

Loan stacking can seem like a good idea when you need to get your hands on fast cash, but taking out more than one loan at a time comes with significant financial risk. Learn more about why you should avoid loan stacking and what other options are out there to help you get the money you need.

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