Loan stacking is a process whereby a borrower secures one or several loans from varied loan providers, comprising one or several at the same time or within a short time span. The following practice can also bear various consequences on your financial status, which may either be fortunes or misfortunes.
Enhanced Burden of Debt
Higher Monthly Payments: When you consolidate several loans, then you are put in charge of several monthly installments, and this can be tiring to the pocket.
Higher Interest Costs: If you are holding loans with high rates of interest, then taking many loans clears a lot of money in form of interest in future.
Having Trouble Managing Debt
Multiple Lenders: Loan stacking therefore refers to a situation where one is dealing with multiple loan providers who all have differing terms, timelines and loan repayment systems.
Potential for Missed Payments: Dealing with a variety of the loans with diverse payment terms and conditions raises the probability of missing or forgetting to pay the amount on time.
Effect on Credit Score
Credit Score Drop: How you apply for multiple loans may harm your score with the credit bureaus and hence the lowering of your score.
Utilization Rate: If the loans are considered as revolving credit such as credit card, availing more than one a loan can raise up your credit utilization ratio (that is, the amount of credit you are currently utilizing divided by the amount of credit that is available to you).
Possibility of Loan Refusal
Risk of Being Overleveraged:. When you have borrowed from several lenders, other lenders may think you have borrowed enough or you are high-risk thereby also denying you a chance of borrowing or opening more accounts.
Stricter Loan Approval Terms: But if you manage to obtain other loans, the interest rates can be even worse and the repayment periods can be significantly shorter.
Prolonged Financial Stress
Debt Snowball Effect: The interest collates from different loans create more depth of the loans and the challenges of repaying them only lead to more borrowing of other loans to cater for the previous debts.
Risk of Default: At the worst, loan stacking can cause borrowers to default on loans.The most severe consequences of recourse borrowing
Possibilities for Consolidation
Debt Consolidation Loans: At times if you have incurred a number of high interest bearing loans it may be possible to integrate them into a single loan with a better interest package.
Refinancing: That is why, having several personal loans it will be possible to combine them together into one loan with more favorable terms.
Temporary Comfort or Adaptability
Access to More Funds: That is why people opt to engage in loan stacking and specifically, try to get as much money as possible if something unexpected was to happen.
Loan stacking can help you when you have some urgent need but is definitely not safe for your credit. This results in higher debt, complicated plans for managing it, and even having a negative impact on one’s credit rating. As much as it may be necessary to stack loans, you should find yourself in some circumstance where you need to start checking how you can consolidate those loans or approach the issue in some more effective manner.
SOLOMON CAPITAL PRIVATE LIMITED is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). RUPEE112 is the brand name under which the company conducts its lending operations and specialize in meeting customer's instant financial needs.
