In this day and age, it’s not uncommon for Canadians to have multiple types of credit products listed on their credit report. Many borrowers have one or more credit cards, a car loan, a mortgage, and maybe even a few personal loans to take care of various expenses. Often, there is nothing abnormal or suspicious about this, as it’s simply how the financial lives of most adults and businesses work.
However, having multiple loans at the same time becomes a problem when something called ‘loan stacking’ occurs, which is often considered to be a fraudulent activity. The idea is that a consumer applies for many loans, from different lenders, all at the same time, with the plan to not pay any of them back or without notifying lenders of their pending loan applications.
Let’s go into more detail about loan stacking and the risks that come with it.
Key Points:
- Loan stacking involves taking out multiple loans in a short period, often from different lenders, to access more money quickly.
- Loan stacking can be dangerous as it can lead to overwhelming debt and increased risk of default.
- While loan stacking in itself is not illegal in Canada, it is against the law to include false information in your loan applications and intentionally mislead lenders.
What Is Loan Stacking?
Loan stacking is when a borrower applies for multiple loans all within a very short window of time. This typically occurs when a borrower can’t qualify for a loan that is large enough, either because their credit or financial profile isn’t strong enough or because they already have too much debt.
Because there are delays between applications, transactions, and credit inquiries that show up on credit reports, the lenders have no idea what is going on. If one consumer applies for five loans from different lenders, within the same day, for example, each lender will have no idea the others exist and will have no reason to be suspicious of the borrower.
Loan Stacking Examples
As discussed, loan stacking occurs when several loans are taken out at the same time or within a short period of time. To illustrate how this may work, let’s use a few examples.
Example 1
Sarah was approved for a $25,000 loan from Lender A, and at the same time, received another loan from Lender B of $50,000. She accepts both offers and now owes a large sum of $75,000.
Example 2
John needs a loan of $25,000 to fund his small business. Unsure if his loan application with the bank would be approved, John decided to apply for a $25,000 loan with a credit union as well. To his surprise, both lenders approve the loan, which he accepts. Now he is $50,000 in debt.
What Are The Risks Associated With Loan Stacking?
When it comes to loan stacking, there are many risks for the borrower, including the following:
- High risk of defaulting on loan payments. Juggling multiple loan payments every month can be stressful, especially for consumers who turned to loan stacking because of strained finances.
- Violating your loan term. Some lenders do not allow you to add a new loan from a different vendor. They can include this restriction in the terms and conditions of the loan contract. If they find out that you are stacking loans, they may require you to immediately pay back their loan.
- More debt to manage. Taking out multiple loans means an increase in administrative work. If you forget to make a payment on time, there could be penalties, resulting in financial loss.
- Harder to access future financing and loans. A new lender will be reluctant to provide you with a loan if you are stacking loans. This is because the new loan will increase your financial burden. If you manage to get the loan, the interest rate will be very high with strict terms and conditions.
- May lower credit scores. Loan stacking may have a negative impact on your credit score, either because of too many hard inquiries or if you’re unable to keep up with your payments.
What Happens If I Lie About My Debt On A Loan Application?
If you apply for multiple loans and intentionally fail to disclose your pending debt, this is called “fraudulent” loan stacking. Often, borrowers who lie on their applications have serious debt problems and use false information to apply for many loans through multiple lenders with no intention of paying them back. This is unethical.
Moreover, in many cases, your loan contract will have specific regulations around loan stacking. If your lender were to find out about undisclosed multiple loans under your name, then your loan agreement may be annulled, in which case you will be expected to repay your loan in full, immediately.
Learn more: Can I Go To Jail For Not Paying A Personal Loan?
Is Loan Stacking Illegal In Canada?
There is no specific federal or provincial law in Canada that explicitly bans loan stacking. Borrowers are technically legally allowed to apply for multiple loans, even at the same time, as long as they don’t intentionally lie to lenders or falsify information.
Can I Roll A Payday Loan Into Another Payday Loan?
A rollover is when a borrower takes a new payday loan to repay the original one, often with added fees. Rolling over a payday loan is not allowed in most provinces across Canada. Even when it’s permitted, there are rules about how much lenders can charge for the rollover, and it can lead to a cycle of debt that is hard to get out of.
More specifically, Manitoba is the only province in Canada where payday loan rollovers may be allowed, though only under strict terms, and fee caps apply.
Learn more: Payday Loans: Know Your Rights
Alternative Options To Loan Stacking
As discussed, loan stacking can easily result in the borrower falling into further debt while also affecting the borrower’s future ability to access financing. If you’re looking for additional funding for yourself, consider the following alternatives.
1. Ask Your Lender For More Money
If you have a long-term relationship with a lender, ask for an additional loan. This approach can be easier than looking for a new lender. You’ll likely need to explain your circumstances and the genuine need for another loan.
Usually, a lender can offer additional financing if you have paid back a major part of your first loan. Furthermore, your lender will probably want to see that you’ve been a responsible borrower and paid all installments on time.
2. Consider A Cash-Out Refinance
If you’re carrying a mortgage and have some equity built up in your home, you may be able to access some of that home equity. You can do this through a cash-out refinance. With this option, you’ll take out a mortgage that’s larger than your current balance, then tap into your home’s equity. The extra funds can be used to pay off high-interest debt or invest back into your property through upgrades or renovations.
Learn more: How To Refinance A Mortgage
3. Choose A Loan Alternative
Rather than stacking your loans, consider applying for a credit card with a low-interest rate or a personal line of credit. These could be a better alternative as you only have to pay interest on the amount you use.
Moreover, repayments are flexible; you only have to pay the minimum balance to avoid any penalties. However, it’s important to note that the remaining balance will continue to accrue interest until repaid.
4. Improve Your Financial And Credit Health
If you’re thinking about loan stacking because you can’t get approved for a large enough loan, consider working on your financial and credit health first. The lower your overall risk, the more a lender will be willing to lend to you.
You can reduce your risk by improving your credit through responsible debt payments. Once you’ve improved your credit, paid down any debt, and improved your finances, then re-apply for the loan you need.
Are You Struggling With Your Bills? Speak With A Credit Counsellor
Credit counselling can help you better manage your debt and improve your financial health through personalized guidance. These professionals work with you to create a realistic budget and explore repayment options. They may also negotiate with creditors to reduce interest rates or consolidate payments.
Ultimately, the goal is to empower you with the tools and knowledge to make more informed financial decisions and avoid future debt issues.
Learn more: Credit Counselling Canada: How Does It Work?
Final Thoughts
It’s important to understand that while loan stacking may be tempting when you’re struggling financially, the negative outcomes always outweigh the momentary positive ones. In any case, if you choose to access further funding, make sure you discuss it with your loan agent to ensure you are not breaching your contract. If you are struggling with large amounts of debt, there are several free credit and debt counselling services available to help you.
