Can You Have Two Car Loans At Once? Read This First.

A car is a purchase that most of us will make at least at one point in our lives. But what happens when life calls for two cars at once, and you just don’t have the cash? Can you take out two loans at the same time? The simple answer is that you certainly can, but there are certain caveats that should be looked at prior to making final decisions.

Two Cars?

Before taking the plunge on that second car, it is important to consider a few things that may have a serious impact.

Impact on Credit Score

Taking out even one loan can have a negative impact on your credit score, so taking out a second car loan on top of a previous one can certainly have negative implications. For example, lets say that you have one car and a loan on it, but you are paying consistently every month. In this case, your credit score will likely take a hit at first, but will rebound after several months to one year of on time payments. However, lets say that you lose your job and do not have the money to pay off the loan; this will hurt your credit score, and will likely hinder you from borrowing in the future. So the question of a second car loan really only exists if you can make timely payments on the first loan. If you are doing so, and want to take out a second loan; similar to the first example, your credit score will likely take a hit at first, but will rebound AFTER several on time payments. Your credit score is extremely important, as it will show creditors whether they can trust they will be paid back when providing a loan to you. If you have a poor credit score it will make financing your mortgage, or anything for that matter, difficult or simply not possible.

 Steps to That Second Car Loan:

 Credit score:

As stated above, the first thing that a car creditor will look at is your credit score. If you have a strong credit score, they are more likely to loan you the amount that you want. Remember, a lender’s goal is to charge you interest on your loan to make income, and then get paid back their full amount when the loan matures. So if you show that you have consistently paid back creditors for loans of similar amounts (good credit score), they are likely to feel comfortable providing you a loan.

Debt to income ratio:

Lenders will look closely at debt to income ratio, For instance, if you have monthly cash outflows in the form of interest payments on certain loans (mortgage, first car loan, student loans) that totals to $2,000, and your monthly income is $4,000, then your debt to income ratio is 50%. The higher this percentage is, the less likely it is that you will be able to source that second loan.

Proof of recurring expected income:

Lenders will want to see your employment contract with your current employer, so they can be sure that you do in fact have future expected income. In most cases, without sending a car lender proof of income, it will be very difficult to obtain a loan.

The intangible

The other piece to this puzzle that will take on some scrutiny is that fact that a second car loan will be seen as subordinate to your first car loan. For instance, your first car lender will feel safe because they know you need at least one car to live and drive to work (in most places, save NYC). Therefore they feel protected that their loan will be paid off. However, what if your income declines and maybe you cannot afford that second car. You may need to sell it, but who knows if the lender will get their entire loan back if you sell at a discount. This is where that second car loan becomes risky and may cost you more (higher interest payments) as a result.

Good luck in your car searches!!

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The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth

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