Loan stacking is the process of applying for multiple loans within an extremely short timeframe to get a lot of money fast. It typically occurs with borrowers applying online for funding, and both individuals and businesses may pursue this path to secure cash.
While loan stacking is not technically illegal, it can lead borrowers to take on more debt than they can comfortably repay — potentially wreaking havoc on their credit scores. Meanwhile, lenders stand to lose a lot of money via loan stacking as borrowers may default on these loans at a higher rate than with single loans. For this reason, some have policies against it written into their loan terms.
In short: Loan stacking is probably not a smart move, even if you’re trying to shore up your finances quickly. Here’s a closer look at this practice.
Defining Loan Stacking
Loan stacking is defined as taking out multiple loans in a short period of time in order to access large amounts of money. It typically happens via securing loans online.
While many consumers have multiple personal loans or credit cards, loan stacking is different because of the speed with which the loan applications are submitted and processed.
Some people and businesses may be legitimately trying to secure multiple loans (say, they’ve discovered they can’t increase the amount of a personal loan they already have and urgently need to fund major home repairs).
However, others who engage in loan stacking may have no intention of ever repaying the loans; they just want access to large amounts of cash fast. This can constitute loan stacking fraud.
How Loan Stacking Works
Given the speed with which many online lenders approve applications — faster, sometimes, than hard inquiries can show up on a credit report — borrowers may be able to secure multiple loans from different lenders in quick succession. When that happens, the borrower may be approved for large amounts of credit they might not otherwise have qualified for. (A lender might have declined to offer a loan if the applicant’s credit report had reflected the other loans being sought.) With a significant amount of debt secured, these borrowers could default on one or all of their loans.
That said, many financial institutions are wise to the ways of loan stacking and may include language against it in the fine print of the contract you sign to apply for the loan.
That means that if you’re engaging in loan stacking, you’re breaking the contract — which could nullify it or, in extreme cases, constitute fraud.
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Risks and Consequences of Loan Stacking
If you feel you need a lot of money in a short amount of time, loan stacking can be tempting. However, there are some serious risks and consequences to consider.
• Increased debt burden. Obviously, if you borrow a lot of money, you’re going to owe a lot of money — more than you may be reasonably able to pay off. This can add to your financial stress and keep you from other goals, such as saving for the down payment on a house.
• High interest costs. Most loans aren’t free. Even if you qualify for interest rates on the lower end of the spectrum, when you have multiple loans at the same time, interest can quickly add up.
• Potential default. If you fail to repay your loans on time, they may go into default and be sent to collections. This can negatively impact both your credit score and your peace of mind. Collections agencies are within their rights to call you daily and may do so until they’re instructed otherwise in writing.
• Negative credit impact. Aspects of loan stacking can negatively affect your credit score over time. (The amount you owe, for instance, accounts for 30% of the calculation. Getting a stack of loans will send debt higher and likely lower your score.) High interest charges and surging debt levels can cause you to make late payments or miss them altogether, further harming your three-digit number.
In these ways, loan stacking can have significant negative implications for your financial and overall wellbeing.
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Legal and Ethical Considerations
Along with the negative ramifications on your financial standing and credit report, there are also legal and ethical reasons to think twice before loan stacking.
• As mentioned above, some lenders have explicit policies against taking out multiple loans at the same time. While loan stacking may not technically be illegal, this means that you’d be breaking the lender’s rules.
• If you carefully read the fine print on the application, you may see that you’re required to disclose any other loans (such as a personal loan or a HELOC) that you’ve recently applied for or taken out. These disclosure requirements mean if you fail to share this information, you may be committing application fraud. At the very least, the contract may be rendered null and void if the lending company discovers what you’re doing.
• In more serious cases (say, in which other crimes occur), fines, legal fees, and even jail time could be involved.
Alternatives to Loan Stacking
If you’re making the wise decision to avoid loan stacking, there are alternatives that could help you get the financial relief you need without the risks that this tactic carries.
• Debt consolidation loans. If the reason you’re looking to borrow money is to pay off other money you’ve borrowed, debt consolidation might be the right answer. This involves taking out a new personal loan to consolidate your debt (or balance transfer credit card) to pay off your existing debt and simplify your life by making just a single payment each month.
This financial move, if it involves personal loans, may offer the added bonus of lowering your overall interest rate.
• Credit counseling. Bad credit habits are unlikely to resolve themselves without intervention. This means that even if you successfully pay down your debt, you might find yourself right back in the same “I owe too much” place in a few months or years. Credit counseling can help you get out of debt and ensure you avoid it going forward.
This service is often offered for free or for a low fee by nonprofit organizations. A certified counselor can help you assess your situation and take steps to better manage your money.
• Negotiating with current lenders. Even if they don’t advertise it, many lenders will negotiate with you to help lower your monthly payments or extend the time you have to repay your loan. Extending a loan can involve paying more interest over the life of the loan, but it may be a wise move if money is tight and you are struggling with debt.
• Exploring other funding sources. Taking out a single, large personal loan might be a better idea than loan stacking. In addition, you could also look into borrowing funds from friends and family or peer-to-peer (P2P) lending, a method of borrowing in which people borrow and lend money to one another without a bank being involved.
If you are considering loan stacking, it may be a smart step to consider these alternatives and find one that best fits your current situation.
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The Takeaway
Loan stacking — taking out multiple loans online from different lenders in a short timeframe — can be a dangerous move that can worsen a bad financial situation. It can lead to considerable debt and hefty interest charges, harming your credit score and your financial and emotional status.
If you need cash quickly, other options, such as securing a single personal loan, may be a better path forward.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
Is loan stacking legal?
While loan stacking is technically not illegal, some lenders may have explicit policies against it. This means you may not be qualified for additional credit or borrowed funds if the lender sees that you’ve recently successfully applied for another loan. Additionally, using someone else’s name or personal information to apply for a loan is identity theft or identity fraud, which is a crime.
Can you stack personal loans?
While it’s certainly possible to have more than one personal loan, loan stacking on purpose can backfire. If you borrow more than you can afford to pay back on time, you can tank your credit score. Furthermore, these days, many lenders are wise to loan stacking, and they may not approve your application if they see another recent hard credit check on your file.
What are the risks of loan stacking?
Loan stacking can quickly put the borrower deeply in debt, potentially making it impossible to repay the loans in a timely fashion. This, in turn, can be devastating for their credit score and financial wellbeing. Additionally, since many lenders see loan stacking as a risk to their business, some have beefed up their underwriting process to prevent loan stacking, so you may simply be denied. Finally, if you falsify any information on your loan application or apply for multiple loans with no intention of repaying them, you may be guilty of application fraud, which can lead to fines and other consequences.
Photo credit: iStock/porcorex
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