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Establishing a credit history is an essential part of qualifying for loans. It's an interesting dichotomy: to get a loan you need to have gotten loans or made purchases on credit in the past.
For instance, if you meet with a lender about securing a mortgage loan, the lender will pull your credit. If you have no credit history-if you don't have a proven track record of paying on a car or paying off a credit card-the lender will almost certainly shy away from approving your loan. This is because you haven't yet demonstrated the ability to make on-time payments or adhere to the terms of installment payments.
So the short answer to the question "How many loans should I apply for?" might be something like "multiple." The longer, in-depth answer, however, provides a more cautionary tale.
In reality, deciding how many loans to apply for and secure is a delicate balancing act. Yes, having a credit card and a car loan is probably a wise idea if you're going to apply for a home loan. However, too many loans and too many installments and credit purchases can do far more harm than good.
Here are two problems with too many loans:
- Too much debt can hinder your chances of qualifying for other loans. When you meet with a lender to apply for a home loan, or if you are trying to secure an automobile loan, one of the biggest factors in deciding whether you qualify is how much debt you have. Consider if you have a car payment, three credit card payments, a student loan payment, two installment payments for medical bills, and a personal loan. That's a lot of debt, which will drive down your debt-to-income ratio. A lender will be shy to pull the trigger on a mortgage loan. And even if you do qualify, your rates and terms will not be favorable.
- Applying for multiple loans can drive down your credit. Credit score is another integral factor in loan qualification. High credit scores lead to good rates and terms, while low scores put your ability to qualify for loans in jeopardy.
On the other hand, there is one good reason to consider applying for multiple loans: shopping for the best rates. It's important to select the lender that's right for you and meets your needs. Looking at multiple places can be a wise practice of doing your own due diligence. This works best, however, if you're searching for multiple lenders for the same type of loan. For instance, applying for a couple of mortgage loans with different lenders won't be detrimental, but applying for a mortgage loan while applying for half a dozen other types of loans simultaneously will incur negative effects on your credit.