Navigating Multiple Loans: Factors Influencing Lenders' Decision-Making Processes

Multiple Loans: Understanding the Rules and Risks

Borrowers can have more than one loan at a time, provided their income and repayment capacity can handle multiple loans simultaneously. Banks do not impose a limit on the number of loans, but they scrutinize credit score, equated monthly incomes (EMIs), and overall debt load. If a large portion of a borrower's salary is directed towards repayments, a new loan can be a challenge.

According to BankBazaar CEO Adhil Shetty, there is no rule that caps the number of loans an individual can hold at the same time. A borrower can carry a home, car, and personal loan, as well as a credit card outstanding, all at once. However, the practical limit is imposed by mathematics, as every new loan reduces the income available to service new debt.

Lenders use the fixed obligation to income ratio (FOIR) to measure a borrower's capacity to repay. Most lenders prefer this ratio to stay within 40 to 50 percent of net monthly income. Borrowers who manage their finances well and maintain a clean repayment record can carry multiple loans.

Read also: Correcting Credit Score Errors: A Guide to Ensuring Accurate CIBIL Reports and Optimal Loan Eligibility

Factors at Play

Before approving an additional loan, banks and non-banking finance companies (NBFCs) assess several financial and behavioral indicators. The starting point is usually the credit score, where anything above 750 improves approval chances. A score below 650 can make borrowing harder.

Lenders also examine repayment history, EMI obligations, income stability, debt-to-income ratio, and the mix of secured and unsecured loans to assess repayment capacity and financial discipline. Furthermore, lenders use alternate data points such as bank statement analysis, salary and cash-flow patterns, utility bill payments, GST records, digital footprints, and transaction behavior to build a more holistic view of a borrower's creditworthiness.

The nature of existing debt also carries weight, as multiple unsecured personal loans are read as a riskier signal than a home loan paired with a single other obligation. Repayment history across all accounts is examined closely because a pattern of late payments across multiple loans tells lenders far more than any single data point.

Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile

Impact on Credit Score

Taking multiple loans at the same time can impact a borrower's credit score and future borrowing capacity. While timely repayment can strengthen a credit profile, excessive borrowing within a short period may increase inquiries, raise leverage, and signal greater dependence on credit. For revolving credit like credit cards, using more than 30 percent of the available limit can negatively affect the score.

According to Shetty, carrying multiple EMIs makes the FOIR tighter, which restricts the size and terms of any future credit sought. Therefore, borrowers should carefully manage their finances and maintain a clean repayment record to avoid any negative impact on their credit score and future borrowing capacity.